#dollar-strength

#dollar-strength

EURUSD remained under pressure and closed yesterday's session lower for the fourth consecutive day, showing that the U.S. dollar is gaining clearer short-term strength. The pair is currently trading around 1.1650, down slightly by 0.1% on the day. This movement reflects the market's adjustment of Fed policy expectations after a series of hotter-than-expected U.S. inflation data.

Changing expectations about the Fed's stance, a tense geopolitical backdrop, and the impact on inflationary risks have fuelled caution ahead of Chair Powell's comments. Yields and the dollar remain exposed to escalating tensions in the Middle East, as disruptions to energy infrastructure and key supply routes pushed oil prices higher, stoking inflation concerns.

February's ISM Manufacturing PMI surprised to the upside at 52.4, marking a second consecutive month in expansion territory. At the same time, the prices subindex reached its highest level since mid-2022, highlighting mounting cost pressures. Sticky inflation risks reduce the scope for near-term rate cuts and reinforce support for longer-dated Treasury yields.

The biggest driver for PCY over the next 12 months is U.S. interest rate trajectory. When the Fed cuts rates, two things benefit emerging market sovereign debt. First, U.S. Treasury yields fall, making PCY's 6.1% yield more attractive to income-focused investors. Second, rate cuts typically weaken the dollar, reducing the debt servicing burden for emerging market governments that borrow in dollars.