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The US dollar enjoys the strength enthused by the hawkish hike. What’s next?

Here is their view, courtesy of eFXnews:

Danske Bank FX Strategy Research argues that  the risk of aggressive Fed near term suggests USD strength will be temporary.

On the face of it, the Fed package of hikes and QT looks rather hawkish: Fed confirms its eagerness to move on with both rate hikes and balance-sheet reduction (aka quantitative tightening (QT)).  This should keep the USD supported near term.

However,  the drop in actual US core inflation in May combined with a downgraded inflation outlook from the FOMC makes us doubt that the Fed will in the end be able to move on with the somewhat aggressive tightening scheme that it otherwise hints at.  Thus, USD strength driven by Fed should prove temporary in our view.

In sum,  we see a clear risk of the Fed moving too much, too fast on hikes and/or QT near term and thus being forced to pause later on and possibly at a time where the ECB is ready to take the next step away from further easing towards year-end,” Danske argues.

In line with this view,  Danske maintains a bullish EUR/USD view in the medium term but staying tactically short* the pair targeting a dip to 1.0850 over the summer.  

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