Investing.com – The US dollar is on track for a big weekly decline on renewed dovish expectations for the Federal Reserve, but this selling appears to be overdone, according to HSBC.
At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading at 104.640, on track for a weekly loss of around 0.5%, as well as a monthly decrease of 1.3%.
The USD has suffered a “double whammy” of late, HSBC analysts said in a May 16 note.
Softer than expected US activity data and the lack of further upside surprises in April inflation data have revived Fed easing expectations – hitting the USD through the interest rate channel – and fueled risk appetite – hurting the USD through the risk appetite channel. has shown recent signs of gaining traction.
However, this two-pronged blow to the USD could also work in the opposite direction, the bank added.
After three months of upside surprises, the Fed may need more than one month of inflation data to ensure inflation is moving toward its target.
Also, the Fed’s rhetoric calling for patience could unsettle the market ahead of the June FOMC, where new “points” loom.
“We expect last month’s USD selling to end in the coming weeks, with a possible rebound against currencies that could deliver a mild surprise or are vulnerable to risk aversion,” the British bank said.
HSBC has chosen to express this expected shift in the dollar tone against the euro by opening a trade idea to sell at $1.0880, targeting $1.0550, with a stop at $1.1050.
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At 5:25 AM ET, EUR/USD was trading at $1.0841, on track for a weekly gain of 0.7% and a monthly increase of 1.9%.
“While the ECB’s rhetoric suggests that a rate cut in June appears almost certain, we believe the market is underestimating the risk that the door remains open for a further cut in July,” the bank said.
