Investing.com – The U.S. dollar is set for a big weekly fall on renewed dovish hopes for the Federal Reserve, but HSBC said the selling “appears exaggerated.”
At 05:25 ET (0925 GMT), the dollar index, which tracks the U.S. dollar against a basket of six other currencies, was trading at 104.640, marking a weekly loss of about 0.5% and a monthly decline of 1.3%.
The US dollar has suffered a “double whammy” recently, HSBC analysts said in a May 16 note.
Softer-than-expected US economic activity data and a lack of further surprises in April inflation data revived dovish Fed hopes (punching the US dollar through the interest rate channel) and helped stimulate risk appetite, hurting the US dollar through the risk appetite channel, which has recently shown signs of gaining momentum.
However, this two-pronged blow to the US dollar could also work in the opposite direction, the bank added.
After three months of upward surprises, the Fed may need more than one month of inflation data to be confident that inflation will reach its target level.
In addition, the Fed’s rhetoric calling for patience may upset the market ahead of the June FOMC meeting, where new points are expected.
“We expect last month’s sell-off in the US dollar to end in the coming weeks, and a rebound against those currencies that could deliver a dovish surprise or that are vulnerable to risk aversion is possible,” the British bank said.
HSBC decided to express this expected change in the dollar versus the euro by opening a sell trade idea at $1.0880 with a target of $1.0550 and a stop at $1.1050.
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At 05:25 ET, EUR/USD was trading at $1.0841, up 0.7% on the week and 1.9% on the month.
“While ECB rhetoric suggests a June rate cut appears all but inevitable, we believe the market may be underestimating the risk that the door will remain open for a further rate cut in July,” the bank said.