HSBC Global Macro Strategist: Shifting narratives

Research evidence excerpt

HSBC Global Macro Strategist: Shifting narratives

activity and asset prices.

This relative strength matters because it reinforces the gap between US nominal growth and the

rest of the world. Faster nominal growth helps the US economy absorb higher interest rates and

supports corporate earnings, but it can also keep inflation and bond yields elevated. If the

divergence widens further, the result may be a stronger dollar, elevated global reference funding

rates, tighter global financial conditions and less room for central banks elsewhere to ease.

Our FX team therefore revised its forecasts towards a stronger USD across the forecast

…with a strong ‘nominal

horizon11. EUR-USD is now expected to fall from 1.14 in the second quarter to 1.12 by end-growth’ outlook…

2026 and 1.10 by the second quarter of 2027. The key ingredients are a more inflation-focused

Fed, less forward guidance and the fact that rate-hike pricing remains firmer in the US than

elsewhere, particularly after the fall in oil prices reduced tightening expectations in several other

economies.

The stronger dollar is not necessarily disruptive in and of itself. For now, the move appears to

…which should support the

be more concentrated against G10 currencies and less so against EM – which is probably a firstUS dollar and keep reference

funding costs elevated – and the broader risk backdrop remains largely supportive. But it does raise the hurdle for carry

and increases the importance of policy credibility, external resilience and domestic

fundamentals, i.e. the idiosyncrasies.

There is also an important caveat. US exceptionalism may have a shelf life. US activity surprises

have already outperformed strongly since April, while some forward-looking labour-market

indicators are becoming less convincing.