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HSBC are sellers of the Euro against the U.S. Dollar, anticipating a retest of 2022 lows as a recent rally is considered a position squeeze on premature hopes of a Federal Reserve pivot, rather than representative of a trend change.

HSBC has advocated a lower Euro trend for over a year and does not believe it is set to reverse yet.

"The key components that have supported USD strength – soft global growth dynamics, fragile risk appetite and relatively higher US yields – should continue in the months ahead," says Dominic Bunning, Head of European FX Research at HSBC in London.

The Euro to Dollar exchange rate (EUR/USD) fell to a low of 0.9535 on September 28 before recovering back to just below parity.

The rally has indeed since faded and EUR/USD has fallen for four days in succession at the time of writing, taking spot back to 0.9716, bank transfer rates to approximately 0.9445 and specialist payment rates to 0.9688.

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HSBC opened the new sell recommendation at 0.9915, near the top of the bounce:

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"A Fed pivot is unlikely at this juncture, while European data continues to deteriorate and surprise notably to the downside," says Bunning.

The Federal Reserve is tipped to raise interest rates a further 75 basis points at the November FOMC, with money markets suggesting a 50bp hike is likely in December in an ongoing attempt to lower inflation.

The additional rate hikes keep alive a U.S. Dollar-supportive trend that has been in place since 2021.

Notably, the market has of late been lowering its expectations of a rate cut taking place in 2023, which has proven a particularly 'hawkish' development for the Dollar.

"The Fed’s core focus is on inflation, which we think will take longer to shift enough to prompt a dovish reappraisal from the FOMC," says Bunning.

The Euro is meanwhile anticipated to struggle amidst signs Eurozone economic activity continues to deteriorate.

"Our measure of speculative short EUR positions has rebounded markedly already. This points to a position squeeze rather than a fundamental change of trend. The risk-reward therefore supports selling EUR-USD," says Bunning.

The recommendation targets a decline in Euro-Dollar to 0.9560. The 2022 low is at 0.9535.