The U.S. Dollar Faces Weekly Decline Amid Fed Uncertainty
HSBC Analysis: Dollar’s Dip Overblown
As the week winds down, the U.S. dollar is poised for a significant drop, driven by renewed hopes for a dovish stance from the Federal Reserve. HSBC analysts believe that the current selling pressure on the dollar may be exaggerated despite the downturn.
Dollar’s Performance
Currently, the Dollar Index sits at 104.640, set to close the week with a 0.5% decrease and a monthly decline of 1.3%. This downward trend is attributed to recent softer U.S. activity data and lackluster inflation numbers for April, fueling expectations of a more dovish Fed stance.
HSBC’s Take on the Situation
HSBC describes the recent blow to the dollar as a “double whammy,” affecting the currency through both rate expectations and risk appetite channels. While the market sentiment may lean bearish currently, the bank suggests that this downward pressure could reverse in the near future.
The HSBC team anticipates that the Fed may need additional data to solidify its inflation outlook, potentially leading to a shift in sentiment towards a more patient approach. Federal Reserve rhetoric leading up to the June FOMC meeting could also influence market dynamics, injecting uncertainty into the equation.
Despite the current selling pressure on the dollar, HSBC expects a reversal in the coming weeks. The bank has identified the euro as a potential currency for a shift in dollar tone, proposing a trading strategy to sell at $1.0880, target $1.0550, with a stop at $1.1050.
Market Outlook
At the moment, the EUR/USD pair is trading at $1.0841, heading for a 0.7% weekly gain and a monthly increase of 1.9%. HSBC also notes the possibility of an ECB rate cut in June, hinting at the market underpricing the risk of further cuts in July.
