US dollar could pull back amid central bank 'bonanza'

Investing.com -- The US dollar may experience a temporary pullback in December as a wave of central bank meetings unfolds, according to Citi analysts. 

Nine of ten G10 central banks are set to meet over the next three weeks, with five—including the Federal Reserve, European Central Bank (ECB), Bank of Japan (BoJ), Bank of Canada (BoC), and Swiss National Bank (SNB)—expected to announce rate adjustments, explained Citi. 

They highlight that market expectations currently align with a more hawkish Fed and more dovish stances from the ECB, BoJ, and SNB. However, Citi’s FX Strategy team anticipates a different outcome. 

“Should markets reprice—and central banks deliver—in line with our expectations, we would expect that could lead to a slightly lower USD,” the analysts stated.

Data from the US and Canada will play a critical role in shaping market sentiment, particularly labor market data due on Friday, December 6, says Citi. 

For the ECB, BoJ, and SNB, Citi sees less immediate risk for significant market surprises, but expects increasing convergence in market expectations as their meetings approach.

In the near term, the dollar’s performance may shift toward relative rate dynamics rather than being heavily influenced by US policy developments. 

Citi notes the potential for a "EURUSD squeeze" if central bank actions align with their forecasts, which they state “only looks more likely as we look at the broader central bank landscape in the coming weeks.”

Despite the expected short-term USD dip, Citi remains strategically bullish on the dollar for the first half of 2025. 

"We would like to use any USD dips in December to build longs for H1 2025," the analysts concluded, underscoring their confidence in the dollar's broader strength heading into the new year.

Source: Investing.com