The move higher in the USD since the start of the year has been a bear market bounce according to the investment firm ING. Their call is based on the view that the current correction higher in the USD will provide some decent levels to rejoin the USD as a core seller.

Some of the reason for their position is as follows:

  • Bond markets have sold off as confidence in a global recovery has grown. However, this rise will be limited in the near term.
  • Their macro team does not buy into the inflation threat perspective.
  • They are waiting for a sufficient inflation premium to be priced into bonds so that pro-cyclical currencies (like AUD & NZD) can advance again. This would support pairs like the AUDUSD and NZDUSD.

They see the dollar rally as a bear market bounce and remain fully invested in a Q2 story of a broadening global recovery to lift all currencies – including the EUR. They see a EURUSD correct dip to 1.17/1.18 to be followed by a recovery to 1.25 in the summer. They also like GBP strength. It is worth mentioning that their piece was before the COVID-19 surge in eurozone cases, so that may skew the pitch on this as it was their March outlook. ING see equity and commodity gains having much further to run, which would of course be helped by a weaker USD.

Looking at the Dollar Index

The Dollar has moved up to the key 93 level and is capped by the key multiyear trend line marked on the chart. This level remains key and as long as sellers can keep price below the trend line then that opens up the way back down to a retest of 89.00 if ING’s outlook is correct. A key risk that can be seen to their view is that bond tapering starts to be spoken about soon and that should be USD positive.

Read their full piece here