According to the analysts at HSBC, March’s USD sell-off is already running out of steam in April, and they expect modest USD strength ahead, but much of this is the mirror of their expectations for headwinds elsewhere in G4.

Key Quotes

“We always believed a sustained EUR rally was unlikely, and it has already begun to falter. GBP is vulnerable to evolving politics and a softer cycle, while the JPY’s outperformance will likely flip to underperformance now that the USD selling momentum is ebbing.”

“We had expected modest upside from the USD in March but were wrong. Between 15 February and 8 March, the probability of a March FOMC hike rose from 44% to 100%, but the DXY index was up only 0.4%. We had expected the USD to play some catch-up as a result, but the lack of a hawkish shift in the “dots” only encouraged USD bears further.”

“Looking ahead, it seems unlikely that the USD will be materially affected by the Fed in the coming month. The FOMC has coalesced around the idea that three rate hikes may be the most appropriate pace for 2017, with nine members formally reflecting this in their “dot” and rhetoric generally clustered around here, too. It suggests the bar will be rather high to any near-term shift given the strong consensus. In addition, the market digested the March hike so readily, it seems unlikely the Fed would want to shake things up with any noteworthy change in perspective. In turn, this means it will take big outliers on the data to drive any lasting USD reaction, especially with the May FOMC not likely to feature prominently in the market debate for the timing of the next hike.”

“On the political front, the USD fixation is on the prospects for President Trump to get his legislative agenda through Congress. The difficulties in getting healthcare reform through the House of Representatives, which was expected to be comparatively straightforward, has ensured policy votes will now be highly market sensitive going forward. The USD is likely to remain the ‘middle man’ in terms of FX sensitivity, losing ground to the rest of G10 on ‘risk off’ signs that the agenda is stalling but strengthening against EM FX. We believe the retreat in market reflation hopes and associated USD weakness is now complete, and we would not chase any USD selling too aggressively as the other currencies face issues of their own.”

“In terms of levels since the US election in November 2016, the DXY index has seldom spent very long below 100, and this remained true of the latest sell-off. We do not believe the ingredients are yet in place for the USD to embark on a bear trend, and support at the 200-day MA has already proven significant. A shift in the US policy focus to tax reform may already be re-energising USD bulls even if they will have to face a market more sceptical of the Trump administration’s ability to deliver its agenda into law.”