Societe Generale Research sees a messy direction for the USD as it approaches its peak rally.
"We might finally have priced in peak Fed Funds. We might just about have seen the best level for DXY. Certainly, the next 10% move in DXY seems much more likely to be down than up. But not yet.
The war in Ukraine and the energy crisis still leaves the European currencies almost unbuyable except for short-term trading. The “Soft landing, Fed pivot, buy risk, buy EMFX” trade may work in a while, but hard landing risks haven’t gone away given the Fed’s need to squash inflation. In any case, Fed Funds futures won’t price lower rates confidently while every Fed speaker is emphasizing the need to get rates high enough and then keep them there," SocGen notes.
"For now, the danger is that the dollar neither goes up in a straight line, or starts its long descent. Like the top of most very high mountains, this dollar peak has thin air, strong winds, high volatility and plenty of danger…," SocGen adds.