The spread of the Delta variant has challenged the US economy, fuelling the idea that the Federal Reserve (Fed) may delay tapering. This potential delay could weigh on the USD, albeit temporary, in the view of economists at HSBC. They expect the USD to strengthen gradually, due to the slowdown in global growth and the Fed’s path towards normalisation.

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“COVID-19 in the US has been challenging lately, and that has been cited as a near-term downside risk by the Fed. Indeed, the US economy is losing some speed. All this fuels the idea that the Fed may delay tapering.”

“A potential delay in the slowing of the Fed’s balance sheet would test the USD, although we believe it would be temporary. Once the spread of the Delta variant shows a sign of peaking then the Fed would presumably resume its path towards gradual normalisation.”

“We still believe the USD is gradually transitioning to a stronger path for two key reasons. First, global growth may be losing speed but is not seen as decelerating quickly. If we believed the latter could occur, then we would factor in a much steeper USD climb. Second, the Fed is edging closer towards eventual rate hikes, which should support the USD, especially when tapering actually starts.”

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