Dollar to rally or not enough inflation? - Rabobank

Analysts at Rabobank explained that while the building blocks of a sustained rally in the USD may appear to be moving into place, we see significant risk of the move stumbling insofar as the arguments in favour of a notable pickup in inflation still lacks conviction.

Key Quotes:

"Despite healthy levels of employment, wage inflation in the US (and through most of the G10) remain subdued. Low levels of productivity growth are a contributing factor and this is not an easy issue to solve. Until wages rise it is difficult to foresee higher levels of demand driving inflation."

"As it stand we are forecasting only one Fed rate hike in 2017 and we see downside risks to this view."

"The pickup in inflation expectations may thus prove to be a false dawn – or at least a very soggy one."

"We expect the current outperformance of the USD to run out of steam by the end of the year and expect EUR/USD to be mostly constrained by a 1.10 to 1.08 range in the coming months."