The Euro to Dollar (EUR/USD) exchange rate has slipped back towards 1.1415 as investors continue to favour the US Dollar following resilient US economic data and expectations that the Federal Reserve will keep interest rates higher for longer.
HSBC believes EUR/USD is likely to face renewed downside pressure as markets shift their focus back to interest-rate differentials.
The bank notes that geopolitical concerns in the Middle East have eased, reducing one source of support for the Dollar. However, it argues that renewed disruption to shipping routes could quickly restore safe-haven demand for the US currency.
According to HSBC, firm US labour market conditions and sticky inflation continue to justify a cautious approach from the Federal Reserve, keeping longer-term yield support firmly behind the Dollar.
The bank also highlights that Eurozone inflation has cooled, but underlying price pressures remain elevated, leaving the European Central Bank in a difficult position.
HSBC argues that “the EUR loses out on fundamentals”, with interest-rate differentials now re-emerging as the dominant driver of EUR/USD.
The bank adds that the outlook could deteriorate further if energy prices rise again, warning that renewed disruption in the Middle East would increase stagflation risks for the Eurozone and add fresh pressure on the single currency.
