Mackel (HSBC): «The dollar will remain strong even with a higher deficit and appetite for risk»

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«The dollar will remain strong in the coming months. Even in the presence of a widening deficit in the US and a high propensity for risk on the stock market.” Words from Paul Mackel, global head of Fx research, HSBC.

At this turn of history the ECB could cut before and perhaps more than the Fed. Despite this, the euro has recently strengthened a bit against the greenback, why?

Although the market is still evaluating the possibility that the ECB may cut rates more than the Fed this year, we have actually seen a greater reduction in rate cut expectations for the ECB than for the Fed since mid-April, when the exchange rate euro-dollar hit the low. To put this into context, in mid-April the market was forecasting rate cuts of around 80 basis points for the ECB and 40 for the Fed by the end of the year; now cuts of 60 and 30 bps respectively are more likely. In other words, the rate differential has narrowed in favor of the euro.

It is also important to note that risk appetite has been very strong. While the euro is not traditionally a high beta currency, positive market sentiment can still be a supportive element.

The risk-on of the markets has been accompanied in recent months by a strong dollar. How is it possible?