The USD has been under pressure of late, mainly on the back of falling expectations regarding the Fed being close to consider higher rates anytime soon. This is due to both intact uncertainty as related to global growth conditions and intensifying downside risks to price developments.
In that respect it must be noted that inflation expectations, as measured by 5Y forward breakeven rates, have been falling towards multi-month lows of late, irrespective of constructive domestic conditions and the weaker greenback.
This in turn may be taken as a signal of domestic conditions not being constructive enough in order to balance out external factors such as weak commodity price developments, dampening the impact on price developments.
However, we stick to the view that the Fed will regard weaker price developments as transitory and that the central bank remains on track to considering higher rates in October.
Accordingly we anticipate only limited USD downside risk from current levels.
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