Dollar rally may be over, for now - Citi

The US dollar has struggled for gains this week, and Citi thinks its rally may be over in the short term, but still looks for dips to buy the US currency moving into 2025.

At 10:20 ET (15:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded just 0.1% higher to 106.917, having gained almost 3% this month.

“As we think about catalysts into year-end, we see asymmetry as skewed tactically negative for the USD driven by: stretched relative ECB-Fed expectations, seasonality, and positioning,” analysts at Citi said, in a note dated Nov. 25. 

Market expectations for ECB and Fed policy in December have seen a sharp shift towards a more dovish ECB and a more hawkish Fed, helping to drive EUR/USD lower, the bank said.

Currently, markets are pricing in 33bps of cuts for the ECB Dec. 12 meeting, and 13bps of cuts for the Fed Dec. 18 meeting.

“This looks somewhat excessive to us. While ECB speak has become more dovish, the main message in recent comments has been one arguing for steady/gradual cuts,” Citi said. 

“On the Fed side, the outlook for December remains disperse. Even internally, the debate ranges. Currently markets reflect close to a 50/50 outcome between a Fed 0 and 25 bps cut,” Citi added. 

“That seems fair to us, but we think the asymmetry is skewed towards a 25bps cut as this will help keep forward guidance on an easing path.”

We typically think of seasonality as an additional factor to our views, but not the main driver, the bank added. 

“Over the last 10 years, DXY [dollar index] has been down in 8 out of 10 Decembers on average by -0.95%; those have largely corresponded with weakening data surprises. On the margin, this should also support a 25bps cut by the Fed in the December meeting, which is not until the second half of the month.”

Still, the medium-term story for USD remains constructive – at least through H1 ’25 – as US tariff policy and potential for US growth outperformance are likely to support the greenback. 

“We therefore look for December USD dips as an opportunity to re-engage with EUR/USD shorts,” Citi said.

 

Source: Investing.com