USD fell, tracking UST yields lower. While the lead-up to first Fed cut can see USD decline, the subsequent price action for the USD post-first fed cut can vary, as seen from past rate cut cycles. USD’s performance is dependent on the market dynamics and growth environment when Fed cut cycle gets underway, OCBC FX strategist Frances Cheung and Christopher Wong note.

US CPI report is on tap

“If Fed rate cuts were in response to one of those major crisis or major global event risks such as GFC, then safe-haven proxy can typically outperform. These include JPY, CHF and to some extent, USD. However, if Fed cut was more a case of policy normalization, non-recessionary driven and that growth outside-US continues to trudge along (nothot-not-cold), then the USD can underperform. And given that our macro assumption has soft landing as the central base case scenario, our expectations is for the USD to underperform its peers.”

“But in the short term, there are reasons to be just slightly cautious, given that USD shorts may seem a touch crowded and there may still be lingering concerns on growth for Euro-area and China in the near term. Any signs of weak growth and/or equity market softness will be sufficient for USD short squeeze to continue. And in terms of data releases this week, China’s activity data will be released on Sat while ECB Lagarde’s press conference post-ECB decision (Thu) may offer some views on Euro-area activity.”