USD to grind stronger in the coming weeks – HSBC

A surge in risk aversion, triggered by the FOMC minutes among others, pushed the USD to a new YTD high. Economists at HSBC look for gradual USD strength over the coming weeks but if the drift towards the taper shows signs of speeding up, so too will the greenback.

Tapering is likely to start this year

“The idea that the Federal Reserve (Fed) is heading to a taper at some point this year is well-publicised, particularly after the July FOMC minutes, and therefore presumably already embedded in the price of the USD.”

“Fed Chair Powell’s speech at the annual Jackson Hole Economic Symposium (scheduled for 26-28 August) could signal when the taper is likely to begin. We believe the forward guidance will be modified at the 21-22 September FOMC meeting, with a taper to be formally announced in November for a start date in December, which would be enough to support the USD. If things move more quickly, so too will the USD.”

“The taper timing should be data-dependent, so the US employment report for August on 3 September could be crucial. From how the USD reacted to US data surprises over the past four weeks, the USD is well placed to capitalise on any US data surprise, good or bad. Other currencies do not have this luxury.”