FX Viewpoint | USD: After new YTD highs… | Article – HSBC VisionGo

• A surge in risk aversion, triggered by the FOMC minutes among others, pushed the USD to a new YTD high
• We 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 USD

The USD hit the highest level of the year on a surge in risk aversion

On 19 August, the USD pushed to a new year-to-date (YTD) high (Chart 1), boosted by a confluence of factors with a “risk-off” reaction to the Federal Open Market Committee (FOMC) minutes from the 27-28 July meeting (released on 18 August) at the top of the list. Other factors, such as rising global COVID-19 cases and concerns about peaking global sequential growth, have also added to the USD bullish mix. The surge in risk aversion saw Asian and European equities lower by 2%, commodity prices tumbling, and ‘safe havens’ thriving.

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.

We expect the USD to grind stronger in the coming weeks with the risk for a more accelerated move, if the drift towards the taper shows signs of speeding up

In the coming weeks, the focus for the USD will still be the taper timing. 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-dependant, 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 (Chart 2), the USD is well-placed to capitalise on any US data surprise, good or bad, in our view. Other currencies do not have this luxury.

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