FUNDAMENTAL FORECAST FOR THE US DOLLAR: BULLISH

• US Dollar retreats as emerging markets stabilize, CPI data disappoints
• Durable upshift in Fed rate hike outlook likely to offer renewed support
• Haven-seeking demand may return on Kim/Moon meeting, Tria speech

The US Dollar backtracked last week. Ebbing haven demand seemed to be main culprit as emerging market stress moderated, with shares and currencies in the space recovering from 16-month lows. An unexpectedly soft US CPI print likewise weighed on prices, although that move was fleeting as the upshift in Fed rate hike bets after Augusts’ upbeat jobs data proved to be durable.

Indeed, the priced-in probability of an increase in December following an almost certain one this month now stands at 77.2 percent, up from 66.9 percent one week before. A lull in top-tier domestic economic news flow means there is relatively little scope for data disappointment to undermine that. Fed officials have also fallen silent ahead of the following week’s FOMC meeting, neutralizing risk from any dovish commentary.

On balance, that leaves the greenback with room for recovery. Last week’s decline seems to be at odds with the prevailing fundamental backdrop. The Fed remains the most hawkish among the G10 central banks and any lasting improvement in sentiment – whether it comes from easing emerging market stress or elsewhere – will ultimately give the central bank still more room to tighten.

Renewed risk aversion may offer additional support. The presidents of South and North Korea will meet for the first time in 11 years even as relations between Pyongyang and Washington sour anew, leaving ample room for a stray tweet from Donald Trump to generate jitters. Italy’s finance minister Giovanni Tria is also due to speak, which might set the stage for conflict between the new populist government and the EU.