HSBC Warns: Dollar's Turning Point Nears as Data, Fed Take Center Stage

The dollar is approaching a critical juncture, according to HSBC's global head of forex research, Paul Mackel, as the greenback's safe-haven support from recent geopolitical tensions wanes and the market shifts its focus to economic fundamentals and central bank actions.

In a note published Tuesday, Mackel stated that while the dollar has been kept in check by easing financial conditions and the Federal Reserve's patient stance, a turning point is nearing. He emphasized that the currency's next move will increasingly depend on key economic data releases and the policy signals from central banks, particularly the Fed's upcoming meeting in two weeks.

This assessment comes as the dollar index (DXY) traded in a narrow range around 99.29 on Tuesday, after a period of relative stability since mid-May. The index had rallied sharply at the onset of the Iran conflict in late February, driven by safe-haven flows and the U.S. economy's relative insulation from energy price spikes. However, those gains have been partially eroded as uncertainty over the conflict's trajectory persists and as diplomatic efforts, including a limited ceasefire between Hezbollah and Israel in Lebanon, have offered occasional relief.

Geopolitical Relief Fades

The recent easing of geopolitical tensions, including U.S. President Donald Trump's comments on ongoing talks with Iran and a separate ceasefire in Lebanon, initially weighed on the dollar by reducing safe-haven demand. However, analysts at Commerzbank noted that the market remains cautious, with any setbacks in negotiations likely to reignite volatility. The dollar's safe-haven premium is now seen as fragile, leaving the currency exposed to shifts in risk sentiment.

Meanwhile, the yen remains under pressure, hovering near the 160 level against the dollar. Japan's Finance Minister Satsuki Katayama reiterated on Tuesday that authorities are ready to intervene in currency markets as needed, echoing previous warnings. This keeps the dollar-yen pair in focus as a potential flashpoint for intervention.

Data and the Fed in Focus

With geopolitical headlines providing only temporary direction, HSBC argues that the dollar's fate will be determined by upcoming economic data and central bank rhetoric. Euro zone inflation data released on Tuesday reinforced expectations of a cautious European Central Bank, while U.S. data in the coming weeks will be scrutinized for clues on the Fed's next move.

Mackel pointed to the Fed's policy meeting in two weeks as a key event. If the Fed signals a more hawkish stance due to persistent inflation or a resilient economy, the dollar could find renewed support. Conversely, any dovish tilt or signs of economic weakness could accelerate the dollar's decline.

The market is currently pricing in a high probability of a rate cut by year-end, but the timing and magnitude remain uncertain. The dollar's trajectory will depend on whether incoming data confirms or challenges these expectations.

Technical Outlook

From a technical perspective, the dollar index has been consolidating in a tight range between 98.9 and 99.5 since mid-May. A break above 99.5 could signal a resumption of the uptrend, while a drop below 98.9 might open the door to further losses. The narrowing range suggests that a breakout is imminent, likely triggered by the upcoming data and Fed meeting.

HSBC's warning of a turning point aligns with the view that the dollar's safe-haven premium is fading, and the currency is now at the mercy of fundamental drivers. For traders, the key question is whether the dollar will regain its footing or continue to weaken as the geopolitical backdrop evolves and central banks recalibrate their policies.

Key Takeaways

1. HSBC's Paul Mackel sees a turning point for the dollar as geopolitical support fades and focus shifts to economic data and the Fed.
2. The dollar index has been range-bound since mid-May, with a breakout likely ahead of the Fed meeting in two weeks.
3. The yen remains near 160, with Japanese authorities warning of intervention.
4. Upcoming U.S. data and Fed rhetoric will be critical in determining the dollar's next direction.

Sources: CNBC