USD is at a crossroads – Nomura

By FXStreet Analysts at nomura explained that the direction of USD depends on whether the Fed continues to normalise or not.

Key Quotes:

“Over the past year and a half, the outlook for USD has been closely linked to the outlook for the Fed and the amount of policy divergence. However, with some US indicators weakening and financial conditions tightening, the outlook for the US is being questioned.

This leaves USD at a crossroads. On the one hand, the US economy could reassess itself and the Fed may continue on a path of normalisation, leading to further USD gains. On the other hand, economic conditions may change sufficiently to alter meaningfully the path of normalisation, stopping it or even reversing it, leading to further depreciation and likely higher commodity prices as well. Where we end up depends on incoming data over the next few weeks and how much the Fed reassesses its forecast.

Most notably, Fed Chair Janet Yellen’s testimony on 10-11 February will be key. Our economist expects her remarks to suggest the Fed has downgraded somewhat its economic assessment to incorporate the economic data received since the December FOMC, but that she will remain cautiously optimistic on the medium-term outlook. This has the potential …read more

Source:: FX Street