May 17 2024: HSBC believes that the recent selling pressure on the U.S. dollar appears exaggerated, despite the currency being on track for a significant weekly decline amid renewed expectations of a dovish stance from the Federal Reserve.
As of 05:25 ET (09:25 GMT), the Dollar Index, which measures the dollar against a basket of six major currencies, was trading at 104.640, heading towards a weekly loss of approximately 0.5% and a monthly decline of 1.3%.
According to HSBC analysts in a note dated May 16, the dollar has faced a “double whammy” recently. Softer-than-expected U.S. economic data and no significant surprises in April’s inflation figures have rekindled hopes for a dovish Fed stance, impacting the dollar through interest rate expectations. Additionally, increased risk appetite has also contributed to weakening the dollar, as risk-on sentiment has gained momentum recently.
However, HSBC notes that this dual impact on the dollar can also reverse course. The Fed might require more consistent inflation data to confirm a move towards its target, and cautious rhetoric from Fed officials could unsettle markets ahead of the June FOMC meeting.
“We anticipate the recent dollar selling to ease in the coming weeks, with potential for a rebound against currencies that might experience a dovish surprise or are sensitive to risk aversion,” stated the U.K.-based bank.
HSBC specifically highlighted a trade idea to sell EUR/USD at $1.0880, with a target of $1.0550 and a stop at $1.1050. At 05:25 ET, EUR/USD was trading at $1.0841, with a weekly gain of 0.7% and a monthly increase of 1.9%.
The bank expressed concerns about the market potentially underestimating the risk of a follow-up rate cut by the European Central Bank (ECB) in July, despite indications of a rate cut in June.
In summary, HSBC suggests a cautious outlook regarding the extent of dollar weakness, foreseeing potential for a reversal against certain currencies and in response to evolving central bank policies.