Greenback rally could also be over, for now – Citi

Investing.com – The US greenback has struggled for positive aspects this week, and Citi thinks its rally could also be over within the quick time period, however nonetheless appears to be like for dips to purchase the US foreign money transferring into 2025.

At 10:20 ET (15:20 GMT), the Greenback Index, which tracks the dollar towards a basket of six different currencies, traded simply 0.1% increased to 106.917, having gained nearly 3% this month.

“As we take into consideration catalysts into year-end, we see asymmetry as skewed tactically unfavourable 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 EUR/USD 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 to be like considerably extreme to us. Whereas ECB communicate has grow to be extra dovish, the primary message in latest feedback has been one arguing for regular/gradual cuts,” Citi stated. 

“On the Fed aspect, the outlook for December stays disperse. Even internally, the talk ranges. At present markets mirror near a 50/50 final result between a Fed 0 and 25 bps minimize,” Citi added. 

“That appears honest to us, however we predict the asymmetry is skewed in direction of a 25bps minimize as it will assist preserve ahead steering 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 minimize 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 – a minimum of by way of H1 ’25 – as US tariff coverage and potential for US development outperformance are more likely 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.