Investing.com – The US dollar has struggled to make gains this week, and Citi thinks the rally could be over in the short term, but is still looking for dips to buy the US currency heading into 2025.
At 10:20 ET (15:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was trading just 0.1% higher at 106.917, after rising almost 3% this month.
“As we think about catalysts through year-end, we see the asymmetry as tactically negative for the USD, driven by: overextended relative expectations from the ECB and Fed, seasonality and positioning,” Citi analysts said in a note note of November 25.
Market expectations for ECB and Fed policy in December showed a sharp shift towards more ECB easing and a more hawkish Fed, which helped push rates down, the bank said.
Markets are currently pricing in a 33 basis point cut for the December 12 ECB meeting, and 13 basis points of cuts for the December 18 Fed meeting.
“This seems a bit exaggerated to us. While the ECB’s statements have softened, the main message in recent comments has been a plea for steady/gradual cuts,” Citi said.
“On the Fed side, the outlook for December remains scattered. Even internally, the debate varies. Currently, markets reflect an almost 50/50 outcome between a Fed cut of 0 to 25 bp,” Citi said.
“That seems fair to us, but we think the asymmetry is trending towards a 25 basis point cut as this will help keep the rate on an easing path.”
We generally view seasonality as an additional factor in our views, but not as the main driver, the bank said.
“Over the past ten years, DXY [dollar index] has fallen by -0.95% on average in 8 out of 10 December; these largely corresponded to weakening data surprises. At the margin, this should also support a 25 basis point cut by the Fed at the December meeting, which won’t take place until the second half of the month.”
Still, the medium-term story for the USD remains constructive – at least through the first half of 2025 – as US tariff policy and the potential for US growth outperformance are likely to support the dollar.
“We are therefore looking at USD dips in December as an opportunity to re-enter EUR/USD shorts,” Citi said.
