Dollar selling ‘looks like overkill’ – HSBC

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Investing.com – The U.S. dollar is on track for a significant weekly decline in response to renewed dovish hopes for the Federal Reserve, but this selling “looks overblown,” according to HSBC.

At 05:25 ET (09:25 GMT), the dollar index, which tracks the dollar against a basket of six other currencies, was trading at 104.640, representing a weekly loss of about 0.5% and a monthly decline of 1. 3%.

In a May 16 note, HSBC analysts say the USD has recently suffered a “double whammy.”

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Softer-than-expected US activity data and the lack of further upside surprises in April inflation data revived dovish hopes for the Fed – hitting the dollar through the interest rate channel – and helped boost risk appetite, hurting the USD through the risk appetite channel, which has been showing signs of increasing traction lately.

However, this two-pronged hit on the dollar could also have the opposite effect, the bank added.

After three months of positive surprises, the Fed may need more than a month’s worth of live inflation data to be sure inflation is on target.

Moreover, the Fed’s rhetoric advocating patience may worry the market ahead of the June FOMC meeting, where recent “dots” are lurking.

“We expect the past month’s USD selling to stall in the coming weeks, with a possible rebound against currencies that may cause a dovish surprise or are prone to risk aversion,” the British bank said.

HSBC decided to express this expected change in the dollar’s tone against the euro by opening a sell proposal at $1.0880, with a price 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, representing a weekly gain of 0.7% and a monthly gain of 1.9%.

“While the ECB’s rhetoric suggests that a June rate cut appears almost certain, we believe the market may be underestimating the risk that the door will remain open to another cut in July,” the bank said.

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