Analysts at HSBC pointed out in a strategy report: "The Fed's reduced expectations for rate cuts may help the dollar recover some of its losses." They believe that the current exchange rate of the dollar appears quite cheap relative to its fundamentals.
The report questioned a key fundamental factor, namely the significant shift in U.S. interest rate expectations. Investors currently widely expect significant rate cuts in the coming months.
After a recent speech by Fed Chairman Powell, the dollar weakened significantly as he mentioned that the timing for rate cuts had matured. The market increasingly believes that the Fed may cut rates by 50 basis points in September, an unusually large cut for non-crisis periods.
HSBC's Head of U.S. Forex Strategy, Daragh Maher, believes that the dollar's adjustment may be nearing an end and cited two main reasons.
Maher stated: "Firstly, even if the market predicts a 100 basis points rate cut by the end of the year, the dollar still looks overly weak relative to these dovish rate expectations. Secondly, given the lack of evidence pointing to an imminent recession, coupled with the unlikelihood of a 50 basis points cut achieving 'soft landing,' the U.S. macroeconomic conditions do not support such a loose policy stance. Combining these factors, along with the dollar index falling back to its December 2023 lows, we remain optimistic about the dollar's prospects."
Due to the pound's sensitivity to overall market sentiment, HSBC noted that a particular risk for GBP/USD is market selling pressure, which may be related to the Fed's cautious approach to the rate cut cycle, driven by concerns over inflation resurgence.
HSBC further stated: "Relative to interest rate levels, the pound appears strong, mainly correlated with market risk appetite. Considering both interest rates and risk appetite, the pound looks especially vulnerable to declining U.S. rate cut expectations. Overall, GBP/USD lacks upward momentum above 1.30, and despite the current non-extreme positioning, we still see downside risks."
As of 9:25 Beijing time on September 2, GBP/USD was reported at 1.3130/31.
