Key takeaways

• USD may see gradual upside on US resilience and the Fed staying higher for longer.
• EUR could be weighed down by lower rate expectations while GBP is seeing weaker cyclical support.
• We expect modest CAD depreciation in line with rates and oil.

We shifted to a more constructive view on the USD after the June Federal Open Market Committee (FOMC) meeting and expect the currency to grind higher in the coming months. This outlook is supported by continued US economic outperformance and reinforced by monetary policy divergence, with the Federal Reserve (Fed) likely to keep rates higher for longer than other major central banks.

EUR: On the backfoot

EUR-USD may come under pressure as markets refocus on interest rate differentials. Expectations for the European Central Bank (ECB) have been scaled back to slightly more than one 25bp hike by year-end, down from two previously, widening the perceived policy gap versus the US and weighing on the EUR. Headwinds could intensify if shipping through the Strait of Hormuz does not normalise.

GBP: Exposed to USD strength

GBP-USD is being driven by its usual cyclical drivers – Bank of England pricing, global risk appetite, and relative rates – but GBP is increasingly sensitive to broad USD strength as tighter US-UK rate differentials erode its yield advantage. The arrival of a new Prime Minister could determine whether UK policy uncertainty becomes the dominant narrative, an outcome that could leave GBP more vulnerable.

Source: Bloomberg, HSBC

Source: Bloomberg, HSBC

CAD: Limited scope for resistance

We expect slower, gradual weakening for the CAD against a stronger USD, particularly as CAD still appears relatively rich versus its historical relationship with the broader USD, albeit by a smaller margin than a month ago. USD-CAD now looks more consistent with rate differentials and the same is true for its relationship with oil prices. The US-Mexico-Canada Agreement (USMCA) review has, so far, been largely neutral for the CAD.

https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-steady-grind-higher/