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Richard Franulovich, head of FX strategy at Westpac, suggests that the US economy has weathered the Q4 tightening in financial conditions and the Jan shutdown as depicted by the solid Jan payrolls and manufacturing ISM reports.

Key Quotes

“The latest core CPI underscores inflation pressures too; the 3mth annualised core pace picking up to a 2.65%, a nine-month high. The caution is that the USD has priced that in already, leaving it expensive vs rate spreads.”

“US-China trade negotiations appear headed for a market-friendly short term truce, certainly Trump sounds more conciliatory of late, though thornier structural issues are likely to be put on a longer term negotiating path.”

“Altogether the USD appears vulnerable short term given long positioning, overvaluation vs rate spreads, a potential trade-war truce in coming weeks and a 20 March FOMC where the dots likely undergo meaningful downward revision.”

“H2 looks more fertile for USD upside. By then, sustained 2%+ growth and slow-building inflation risks will likely see Fed rethink its pause, challenging market pricing for Fed cuts in 2020.”