Investing.com – The US greenback has struggled for positive factors this week, and Citi thinks its rally could also be over within the quick time period, however nonetheless appears for dips to purchase the US foreign money shifting into 2025.
At 10:20 ET (15:20 GMT), the Greenback Index, which tracks the dollar in opposition to a basket of six different currencies, traded simply 0.1% increased to 106.917, having gained virtually 3% this month.
“As we take into consideration catalysts into year-end, we see asymmetry as skewed tactically detrimental for the USD pushed by: stretched relative ECB-Fed expectations, seasonality, and positioning,” analysts at Citi stated, in a be aware dated Nov. 25.
Market expectations for ECB and Fed coverage in December have seen a pointy shift in direction of a extra dovish ECB and a extra hawkish Fed, serving to to drive decrease, the financial institution stated.
At present, markets are pricing in 33bps of cuts for the ECB Dec. 12 assembly, and 13bps of cuts for the Fed Dec. 18 assembly.
“This appears considerably extreme to us. Whereas ECB converse has turn out to be extra dovish, the primary message in latest feedback has been one arguing for regular/gradual cuts,” Citi stated.
“On the Fed facet, the outlook for December stays disperse. Even internally, the controversy ranges. At present markets replicate near a 50/50 final result between a Fed 0 and 25 bps reduce,” Citi added.
“That appears truthful to us, however we predict the asymmetry is skewed in direction of a 25bps reduce as this can assist preserve ahead steerage on an easing path.”
We usually consider seasonality as an extra issue to our views, however not the primary driver, the financial institution added.
“Over the past 10 years, DXY [dollar index] has been down in 8 out of 10 Decembers on common by -0.95%; these have largely corresponded with weakening knowledge surprises. On the margin, this also needs to help a 25bps reduce by the Fed within the December assembly, which isn’t till the second half of the month.”
Nonetheless, the medium-term story for USD stays constructive – at the very least via H1 ’25 – as US tariff coverage and potential for US progress outperformance are prone to help the dollar.
“We due to this fact search for December USD dips as a possibility to re-engage with EUR/USD shorts,” Citi stated.