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A short-term U.S. Dollar rebound could be in the offing, says ABN AMRO.
Analysts at the bank say "a lot of bad news is priced into the dollar", in a call that comes at the end of a week of consolidation for the currency.
"We could be in for a short-term rebound in the near term," says ABN AMRO's FX strategist, Georgette Boele.
The Pound has risen against the Dollar to its highest level in seven months, reaching 1.3423 on Monday. The new peak followed attacks on the U.S. Federal Reserve by Donald Trump, who wants to see the central bank cut interest rates to bolster the economy.
However, Trump struck a softer tone on Tuesday, which gave investors the chance to pull in some profits on the USD selloff and consolidation has ensued.
Also aiding the trade was a more conciliatory tone towards China, with Trump signalling he stood ready to drastically lower headline tariff rates.
"We think a lot of negative news is already priced into the U.S. dollar, such as the weak growth outlook, expectations for the Fed, policy uncertainty, and geopolitical issues," says Boele.
In addition to this observation, the analyst thinks key USD exchange rates have severed links with fundamentals, leaving pairs like the GBP/USD and EUR/USD overvalued.
"In the past, the difference in 10-year interest rates between Germany and the US were a good guide for changes in the EUR/USD exchange rate. Recently, this relationship has broken down. This is happening not just with the EUR/USD but also with GBP/USD and USD/JPY. We think there is a high risk that rate fundamentals reassert themselves as a driver in the near term," says Boele.
However, the analyst thinks any weakness in GBP/USD and EUR/USD would be temporary and the long-term trend is for Dollar weakness.
We also report today that Deutsche Bank has radically adjusted its exchange rate forecasts as it now thinks the Dollar is in a long-term bear trend.
"The dollar bear market is finally here," say Tim Baker and George Saravelos, foreign exchange market strategists at Deutsche Bank.
"What has changed since the start of the year? The list of superlatives is long – the largest shift in US trade policy in a century; the biggest pivot in German fiscal policy since re-unification; the most significant reassessment of US geopolitical leadership since World War II, to name a few," say the authors.
Deutsche Bank's view on all these factors is that the pre-conditions are now in place for the beginning of a major dollar downtrend.