USD Faces Downside Risks Amid Regional Bank Concerns and Credit Quality Uncertainty

USD: Still downside risks

USD: Still downside risks

Concerns about the health of regional banks and the broader quality of credit in the US remain very central for FX markets. On Friday, some recovery in sentiment helped the dollar rebound, signalling that going forward, some harder evidence backing those concerns is probably required to pressure the dollar again. That will be looked for in this week's regional lenders' earnings releases. Here, risks appear tilted on the downside for the dollar.

Indications that lending issues don’t extend beyond Zions Bancorp and Western Alliance could offer some further relief to the dollar, but it might not be enough to fully price out concerns about the underlying health of the credit market and have the greenback reclaim all losses. On the contrary, evidence of contagion to other lenders or signals of larger credit quality issues can easily send DXY falling 1%+ in the next few days.

On Friday, the BLS will publish the delayed CPI numbers for September. We are aligned with consensus in expecting a 0.3% MoM core read – which should further endorse a 25bp cut by the Fed next week. Barring major deviations from consensus, the inflation release should not have major FX implications, with jobs markets playing a more important role for rate expectations