As the Fed nears the end of its tightening cycle and interest rate volatility reduces, the USD has been grinding weaker. Waves of uncertainty remain, particularly around the US debt ceiling and a resolution should see the tide shift against the USD anew, in the view of economists at HSBC.

The ongoing US debt ceiling discussions could increase volatility

“We still expect the USD to decline, but we remain mindful of possible risks, with the most obvious prevailing source of concern being the US debt ceiling. In fact, the US debt ceiling is not a new issue for the FX market to navigate.”

“To be clear, we are not expecting a technical default. But the debt ceiling issue has the potential to spark a rapid increase in FX volatility. Increasing fear of ‘hard landing’ risks and the subsequent rise in FX volatility could see the ‘safe haven’ USD attempting to rally, before falling. That being said, we think the more probable outcome is still one of a resolution. This would likely keep FX volatility relatively subdued while risk sentiment improves, allowing the USD to weaken going forward.”