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Currency tacticians at HSBC are looking for the Dollar to test 2023 lows over the coming weeks, allowing for a higher Euro to Dollar exchange rate (EUR/USD).

In a monthly briefing, HSBC's currency strategy and research team says the Dollar should fade as it would require stronger-than-expected data releases and a material deterioration in the global banking sector to find a bid.

Daragh Maher, Head of FX Strategy for the U.S. at HSBC says:

"Policymakers are reacting with speed and scale once frailties appear. It suggests that we would need tangible signs of banking sector woes, and not just choppy market price action, to maintain the risk-averse support for the USD. Absent this, or hawkish US data surprises, the focus is likely to shift back to a Fed at or close to the end of its tightening cycle, with ebbing US growth and inflation slowing. Both RORO and rates point to a weaker USD.

The Dollar index recovered during February amidst a run of data releases that proved stronger than expected, suggesting the Federal Reserve might have to raise rates higher than investors had been expecting.

But data out in early April is thus far consistent with a notable economic slowdown and the recent banking sector stresses have raised the cost of credit, thereby further tightening monetary conditions in the U.S.

As a result, money market pricing shows investors are expecting up to 50 basis points of rate cuts from the Fed by year-end, more than anywhere else in the G10.

"By contrast, some other central banks are more keen to highlight the need for further tightening. The ECB’s guidance may no longer offer clarity on the questions of “when” and by “how much” rates will rise, but rhetoric has made it clear that the base case points to more tightening," says Maher.

EUR/USD has meanwhile made a steady recovery from a mid-March low at 1.0516 to test 1.0973 already this week.

A peak technically-minded market participants will be eyeing is 1.1032, the February 02 high.

"We expect EUR-USD to challenge 1.10.," says Maher. "It is difficult to dislike a currency whose central bank says inflation is set to remain 'too high for too long'."