FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the USD has strengthened this week and while the reasons for the USD’s upside can be explained, it is possible that this week’s bullish run on the USD could become over-extended. Key Quotes “While it is likely that some of this flow is linked with safe haven demand, it is difficult to distinguish whether the recent flows into the USD have been a function of investors seeking out a store of value or whether they are the result of hawkish expectations regarding Fed policy. In all likelihood both factors have had an influence.” “The fact that the Fed has been signalling a preparedness to hike interest rates as a time when both the BoJ and SNB are pursuing extremely accommodative monetary policies indicates that the USD is currently the point of least resistance when it comes to safe haven demand.” “The main event on the economic calendar today is the release of the minutes of the October FOMC. Since the statement that accompanied this meeting left the door open for a December Fed rate hike, it can be assumed that the tone of today’s release will be relatively hawkish. That said, since then some Fed officials have stepped up their efforts to re-focus the market’s attention away from the December policy meeting towards the trajectory of monetary policy and there has been emphasis on the likelihood that the pace of policy tightening into next year will be gradual. This is consistent with the fact that inflationary pressure in the US remains moderate.” “Yesterday the release of the US October CPI data confirmed a core inflation rate of just 1.9% y/y. Wage inflation, PCE, PPI and the GDP deflator all suggest that price pressures in the US remain well contained and, since the gains in the value of the USD over the past 18 mths or so has been tightening monetary conditions in the US, it is possible that the Fed will not see the need to tighten policy too far through 2016. If the Fed laces an interest rate hike in December with a fairly dovish message about the likely trajectory of rate hikes, the current wave of USD bullishness could swiftly retreat. For this reason there is risk that parity in EUR/USD may still be further away then it seems. We are targeting a move to EUR/USD1.05 on a 3 mth view.” For more information, read our latest forex news.