French presidential election to mark start of dollar slide, HSBC says

Analysts at HSBC said the French presidential election could be a positive catalyst for the euro as markets moved to price-in less political risk and greater economic upside in the eurozone, but increased political uncertainty in the US would be negative for the dollar.

Centrist Emmanuel Macron winning the first round of voting in the French Presidential election on Sunday and likely being crowned the next president could be a turning point for the euro with political risk fading, while high expectations about the US administration’s fiscal agenda could lead to disappointment.

Market participants are likely to spend the second half of 2017 focusing on when the European Central Bank will abandon its quantitative easing measures, while the prospect of a gradual tightening by the US Federal Reserve is already priced in.

The cyclical upside of possible US fiscal stimulus may turn to structural concerns over the fiscal deficit, which would turn the dollar implications of tax reform from positive to negative.

HSBC also said that the emphasis on bilateral trade imbalances and on a weaker dollar will give prominence to the so-called 'twin deficits' between shortfalls in government spending and foreign trade.

The bank said that the US wants a weaker dollar as US president Donald Trump has repeatedly said that the greenback is too strong.

Against this backdrop, the bank has upped its year-end 2017 forecasts for both euro/dollar and sterling/dollar forecasts to 1.20 from 1.10.

It also lowered the year-end dollar/yen forecast from 110 to 100 reflecting both dollar weakness and a renewed recognition that 'Abenomics' is not working in Japan.

Meanwhile, the dollar/yuan forecast was trimmed to 7.10 from 7.20, with structural outflow pressures expected to lead to a steady weakening in the Chinese currency.