Synopsis: Credit Agricole expresses a perspective that the current strength of the USD, driven by the US economy's resilience and the hawkish stance of the Federal Reserve, may wane over the next few months. However, escalating geopolitical risks can present unexpected upside potential for the USD.
USD Dynamics: The bank's existing outlook on the USD is rooted in the expectation that the prevalent cyclical and policy divergences between the robust US economy & the global landscape and the differing stances of the Fed & other global central banks will soon diminish. As the growth and inflation trajectory of the US moderates, the bank anticipates the Federal Reserve to implement rate cuts in Q2 2024, possibly causing the USD to soften universally.
Geopolitical Factors: Among the various factors that can disrupt this forecast, Credit Agricole particularly emphasizes the unpredictable nature of geopolitical tensions. An escalation in such situations can result in adverse commodity trade impacts, especially for energy-dependent regions like Europe and Asia. This can boost risk aversion in markets.
Potential Impacts: Such geopolitical-driven disruptions can hamper the economic prospects of the Euro and other energy-importing nations' currencies. It can also dent the sentiment around G10 currencies that are more sensitive to risk, consequently benefiting the USD.
Conclusion: While Credit Agricole anticipates a weakening of the USD in the near future, the bank remains cautious, recognizing the potential for geopolitical unrest to unexpectedly fortify the USD. They remain vigilant, ready to adjust their USD perspective in response to unfolding events in the Middle East and beyond.