The Bloomberg Dollar Spot Index may rally 1% on that news, and much of the gain will come from the euro side, Barclay's Koning forecast. — Bloomberg
NEW YORK: The US dollar is poised to rally, as traders are overestimating the extent of Federal Reserve (Fed) rate cuts and underestimating a retail sales report, says Skylar Montgomery Koning, a foreign exchange strategist at Barclays.
She predicted that stronger-than-expected retail sales will shift market bets towards a smaller rate reduction, and therefore boost the dollar.
With the rate announcement due today, traders’ uncertainty about the decision is the highest since 2007 and this consumer report is one of the last pieces of information ahead of it.
“We expect a stronger-than-consensus number and last month the retail sales numbers were very strong as well,” Montgomery Koning said in an interview.
“You could have the pricing shift more towards 25 basis-point cut.”
The Bloomberg Dollar Spot Index may rally 1% on that news, and much of the gain will come from the euro side, she forecast.
Markets have been balancing between a quarter-percentage point rate reduction and a cut twice that size, often reacting to new economic data.
Investors are also expecting Fed chairman Jerome Powell to offer guidance today when making the rate announcement, and for the Fed to update its economic projections.
The dollar index fell as much as 0.4% on Monday, touching the lowest level since January.
The euro gained about 0.4% on the day, with the British pound outperforming peers among developed economies and rising 0.6%.
Barclays forecasts three 25 basis-point reductions this year as the economy is still strong.
Economists are generally projecting retail sales to have declined last month in the back of weaker auto sales. — Bloomberg
