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Foreign exchange tacticians at HSBC are looking for another leg lower in the Euro to Dollar exchange rate (EURUSD) as the Dollar is yet to peak.

In a new strategy update, HSBC says it has opened a trade idea to sell the Euro-Dollar on a belief U.S. Dollar outperformance can extend while the Eurozone economy continues to face an unenviable backdrop of stagnant growth and high inflation.

"The main headache for the EUR is the unpleasant growth/inflation mix which the Eurozone economy faces. The activity data disappointments continue to mount, which is remarkable given there has

been a paring back of growth expectations for the Eurozone on an ongoing basis," says Daragh Maher, Head of FX Strategy for the U.S. at HSBC.

Regarding central bank policy, the HSBC analyst says he finds it questionable whether the prospect of another ECB hike would help the EUR.

"The weak economy means hawkish inflation data is more likely to undermine the EUR through stagflation fears than support it through the rates channel. Safe haven plays are likely to outperform in G10 also, in part because of uncertainty around geopolitics," he adds.

Above: EUR-USD vs Eurozone Activity Surprise Index. Image courtesy of HSBC.

The Euro-Dollar exchange rate has nevertheless shown a robustness of late, remaining above 1.05 for the duration of October, with a particularly sizeable 0.60% gain being recorded on October 30, taking the pair to above 1.0620 at the time of writing.

But this resilience is a trap, according to HSBC's tacticians who see further Dollar upside.

"When climbing a mountain, you can mistakenly think you have reached the summit only to realize there is still more climbing to be done to be truly at the peak. We suspect this false summit trap may be true of the USD currently, and expect it to resume its push higher over the coming month, even if the air is already feeling a bit thin," says Maher.

"The October pause in the USD advance may provide the platform for a fresh rally," he adds.

HSBC expects the Fed to push back against market timing for the first rate cut of 2024 owing to U.S. economic resilience, something the currency world is not yet quite prepared for.

Accordingly, HSBC has opened a trade idea to sell EUR-USD at 1.0576, targetting 1.0220.