Recently released US activity data was stronger than expected. But HSBC’s conviction remains the same, the broader USD is seen weakening in the longer run.
“Markets are currently debating what the recent run of better-than-expected US data means for risk sentiment: The ‘risk off’ and USD bullish angle is that a strong US labour market is supporting consumption, keeping inflation levels elevated , which will force the Fed to act more aggressively than what the rate market has priced in. The ‘risk on’ and USD bearish angle is that both inflation and wages growth are decelerating in the US, ensuring the Fed’s tightening is nearly done without needing to induce a US recession. This also helps to allay concerns of a weaker global growth backdrop and subsequent hard landing.”
“We believe this debate will continue over the near term, meaning that the USD is likely to remain choppy. We also expect further deceleration in inflation and measured increases in the unemployment rate to decisively favour the ‘risk on’ narrative and USD weakness, as the year progresses.”
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