Citi discusses the USD's current drivers and thinks that the month of May could be a critical juncture for the greenback.
"There now appear to be a mixed set of undercurrents driving FX sentiment. These are - (1) Strength in US data but with subdued inflation and a dovish Fed - supportive of a more positive risk backdrop and negative for safe haven FX (USD, JPY & CHF); (2) Euro centric concerns - (a) poor euro zone manufacturing; (b) US-European trade tensions; (c) European parliamentary elctions on May 23 - negative for EUR vs USD; (3) Market pressure for rate cuts from RBA, RBNZ and BoC due to undershooting inflation - negative for commodity FX vs USD," Citi notes.
"Bottom Line - A relatively positive risk backdrop is negative for USD but euro centric risks and pressure on commodity central banks to cut rates are pulling in the opposite direction and helping support USD against EUR and commodity FX.
FX positioning shows EUR and AUD option vols heavily skewed towards a bearish outlook and potentially suggests some further near-term USD strength can turn quickly on (1) a resolution to the US - China trade deal, (2) resolution of euro centric risks (both possible in May) and (3) pushback by commodity FX central banks on Cutting rates (also in May). May therefore is a key month to watch," Citi argues.