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A growing debate in FX at present is whether the Dollar's current rebound is temporary, or whether it can last for a number of months.
Analyst W. Brad Bechtel, Global Head of FX at Jefferies LLC, is of the latter school of thought and is pencilling in a stronger Dollar into year-end as a global slowdown and as U.S. funding issues drive demand for the U.S. unit.
"I continue to think that we are in the earlier stages of what will be a prolonged USD rally straight into year-end 2023," says Bechtel in a recent currency briefing.
He says the Dollar will receive a tailwind from the angst around the debt ceiling which "is only just starting to heat up" and the Swiss Franc will likely be the only outperformer against the USD in that phase.
The call would therefore underline a view that the Pound to Dollar exchange rate (GBPUSD) has reached a peak for 2023, as have the likes of EURUSD and AUDUSD.
"As we move through the debt ceiling and the US Treasury begins issuing an enormous amount of U.S. Treasuries the USD liquidity will drain from the system and this will spark the next leg up in the USD," says Bechtel.
The GBPUSD exchange rate peaked at a multi-month high of 1.2668 on May 08 but is now down 0.80% for the month. The EURUSD is down 1.62%.
The Dollar's rebound is however in its infancy according to Jefferies which sees the broader Dollar index potentially rising a further 5.0% before the cycle is over.
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"If global growth keeps drifting lower and the SPX resolves lower, this will add a catalyst to the USD and likely push us even further in this USD cycle. I am thinking we have at least 5% or more in DXY and BBDXY by the end of Q4," says Bechtel.
The rise in the broader Dollar will however impact the various pairs to different degrees.
"The best gains will likely be against the G10 as well with EUR/USD down to 1.0500 and GBP/USD back to 1.2000," forecasts Bechtel. "AUD/USD might just crack 0.6600 to trade down to 0.6400 or lower in that move as well."
The Japanese Yen is expected to find some support from safe-haven flows, but it too might weaken on the margin although the better trade will be in the other G7 currencies.
"I don't mind playing it in DXY and as an index, as I think that will capture a lot of it but straight EUR/USD, GBP/USD will work as well," says Bechtel.
He says both the European Central Bank and Bank of England will need to hike, but both central banks know they are hiking into a declining growth cycle, so will remain cautious.
"They, too, are draining liquidity from the system through their QT programs and that will only exacerbate the issue on the liquidity side," says Bechtel.
Looking at GBPUSD from a tactical standpoint, the analyst says the pair is now approaching the 50 daily moving average, which comes in around 1.2392.
"GBP continues to be more resistant to these USD upswings and I would only sell the GBP/USD on a break and close below of the 50dma but there is a lot of support in that region that might take time to work through," he says.
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