Brown Brothers Harriman’s (BBH) Elias Haddad notes the US Dollar (USD) is strengthening as firm Oil prices lift bond yields and weigh on equities, while the US-China summit delivered only marginal diplomatic progress. Haddad argues the United States (US) macro backdrop points to a more restrictive Federal Reserve (Fed), with resilient consumption and strong GDPNow estimates underpinning USD support over the coming months.

Restrictive Fed narrative underpins Dollar

"USD is powering forward against most currencies. Firmer crude oil prices are pushing bond yields higher and weighing on equities."

"The US-China summit concluded with marginal diplomatic breakthrough. On trade, the relationship between the two countries has shifted from de-escalation to “constructive strategic stability”, as Chinese President Xi Jinping put it."

"The US macro backdrop argues for a more restrictive Fed which is USD supportive. The underlying disinflationary trend has stalled, the labor market is stabilizing, and consumer spending is resilient."

"Nevertheless, US real personal consumption expenditure (PCE) has been resilient, contributing to half the 2% annualized real GDP growth over Q1. Going forward, the latest Atlanta Fed GDPNow model estimates annualized real GDP growth of 4.0% in Q2 (up from 3.8% previously) with PCE again driving nearly half that expansion (+1.87ppt)."

"The US swaps curve has adjusted higher in favor of USD, pricing in 35bps of hikes in the next twelve months, up from 25bps earlier this week. Today’s US April industrial production data is unlikely to shift the dial on rate expectations (2:15pm London, 9:15am New York)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)