The conditions for a sustained turn lower by the broad USD are still elusive – HSBC

With a hawkish shift in the European Central Bank (ECB) rhetoric and inflation outlook, economists at HSBC expect a faster QE taper and rate “lift-off” in October. Yet, it is not a “shock and awe” moment for the euro, which remains a low yielder. While for the USD to turn sustainably lower, we would need to see an acceleration in global growth alongside pared back Fed expectations, in their view.

ECB to announce a faster QE taper in March, paving the way for a rate hike in October

“With the inflation outlook and change in ECB tone, we now expect a faster ECB QE taper to be announced in March, with net asset purchases ending completely in Q4, shortly before a rate rise of 25bp in October.”

“Inflation is high in the Eurozone and elsewhere but the former’s growth has struggled to rise above pre-pandemic levels. This should emphasise how the stagflation challenge is more obvious in the Eurozone than in the US, and the ECB hiking rates would do little to change this for the better. This also means the EUR’s yield support would still be low, compared to many other currencies.”

“Taking into account the latest economic data and the Fed's rhetoric, our economists now expect 150bp in Fed hikes in 2022, starting with 50bp in March.”

“We believe as the level of short-term yields rise, the currency should be supported over time. Unless global growth starts accelerating and the Fed pares back tightening expectations, the USD should remain resilient.”