FX Navigator (Oct): USD strength supported by a hawkish Fed

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We expect the USD to strengthen modestly over the coming weeks. The outlook is for a gradual improvement rather than a sharp or disorderly appreciation, as cyclical, political and structural factors become more supportive or pose less of a headwind. The key question is whether US rate expectations remain firm relative to those elsewhere.
• Two-year yield differentials continue to have the greatest explanatory power for the broad USD trend, and the September Federal Reserve meeting delivered a sufficiently hawkish signal to support the US side of that equation. The 25bp rate increase was widely expected, but the updated projections pointed to another move before year-end, while a meaningful share of the committee still anticipated additional tightening next year.
• Energy prices are likely to be the main political transmission channel. As other central banks are also sounding hawkish, relative rates may provide only moderate support for the USD. The US is better placed than many economies to absorb persistently high energy costs due to its stronger domestic energy position and lower reliance on imports. 

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We think EUR-USD will trade with a modest downside bias over the coming weeks. The broad USD should remain the dominant driver, and the latest FOMC message suggests that US policy will offer the USD more support than the European Central Bank (ECB) can provide the EUR. The Fed’s September hike was accompanied by a clear emphasis on inflation still running too high and a willingness to tighten again if needed.
• The ECB’s cautious, data-dependent approach makes an October rate hike less likely, while December appears a more plausible window for further tightening. Elevated European gas prices, low storage levels and potential supply disruptions could also weigh on Eurozone growth and the EUR.
• Resilient US labour-market and inflation data would reinforce USD strength, while recent disappointments in Eurozone activity may limit positive EUR surprises. Attention could also shift towards Europe’s fiscal pressures as sovereign yields remain high, supporting a gradual rather than sharp decline in EUR-USD.

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• EUR-GBP is likely to oscillate within its current narrow range driven by fiscal and policy uncertainty.
• The EUR faces similar challenges as GBP such as high energy prices and low inventories, and difficult French budget negotiations over the next month. Rising bond yields, notably in France, may also become an EUR issue.
• Eurozone data showed renewed weakness in September after stronger-than-expected readings from May to late August. In the UK, underlying momentum remains subdued, with soft private-sector activity and employment declining steadily since October 2024.

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• GBP-USD looks vulnerable over the next month. The pair faces a widening contrast between a resilient US economy versus a tepid UK. Weak labour demand, tightening financial conditions and higher energy costs look set to test GBP. Markets already price a substantial tightening cycle despite a reluctant Bank of England (BoE).
• Recent activity held up better than feared, but underlying momentum remains fragile. Higher energy costs are also a major risk. This creates an uncomfortable policy combination: inflation risks are rising even as growth momentum faces a challenging outlook.
• The budget on 28 October is another reason for caution. Even more optimistic investors are likely to hesitate before adding bullish GBP positions ahead of a potentially market-sensitive fiscal event. GBP’s performance will depend not only on the budget’s measures, but also on how gilt yields and fiscal credibility are judged by markets.

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We look for a grind higher in USD-JPY, mostly reflecting our USD view but also a lack of clear Japanese catalysts for JPY strength. Recent coordinated intervention in the currency and the subsequent unwinding of global investors’ JPY short positions have reduced the risk of a large additional squeeze.
• Monetary policy is unlikely to help the JPY in the near term, with the next central bank meetings six weeks away. Markets currently price roughly a 20% chance of a Bank of Japan (BoJ) rate hike on 30 October while investors may be reluctant to adopt an overly hawkish position having been caught off guard by the September meeting.
• Domestic fiscal policy is likely to be the more pertinent domestic catalyst. Upcoming parliamentary debate on the proposed two-year food consumption tax cut, the FY2027 budget and the next five-year defence programme may intensify concern about fiscal credibility. If long-term bond yields rise because investors demand a greater fiscal risk premium, the JPY may not benefit in the usual way. 

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We anticipate the EUR-JPY to trade broadly sideways over the coming weeks.
• EUR remains vulnerable as the ECB appears reluctant to rush further rate hikes, while elevated energy costs and higher European bond yields raise concerns about growth, terms of trade and fiscal health in parts of the Eurozone.
• JPY could also be challenged from its underwhelming Bank of Japan outlook and limited catalysts for sustained strength. Fiscal-policy concerns could add pressure, although the threat of FX intervention should temper any sharp JPY weakness. 

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We expect USD-CHF to trade sideways in the near term. Further oil price rises could support the CHF’s safe-haven status if they trigger periods of risk aversion. Conversely, continued declines in oil prices would ease pressure on the CHF arising from interest-rate differentials.
• Event risk surrounds the Swiss National Bank (SNB) meeting on 24 September, although we believe risks to the outlook are more balanced. Headline inflation has moved back towards the midpoint of the target range and CHF rates have repriced higher versus most G10 counterparts in recent trading days.
• FX intervention risk also appears limited and language pertaining to intervention was recently omitted from a presentation by Chair Schlegel (Bloomberg, 11 September).

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We see EUR-CHF moving lower over the coming month. The CHF has weakened in recent months, reflecting its low yield and the relatively less hawkish repricing of the SNB, particularly amid elevated oil prices. However with oil trading not far from USD100/b in recent times, rate differentials have become a less of a significant driver of EUR–CHF.
• We therefore see scope for a CHF recovery. High oil prices would offer the CHF safe haven appeal if this translates into periods of risk-off. Conversely, a further decline in oil prices would ease pressure on the CHF arising from rates differentials.
• Fundamentally, a recovery in the Swiss trade balance also points to the case for a stronger CHF, as does the country’s lower energy dependence compared with the Eurozone. 

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• The CAD looks vulnerable to modest further weakness against the USD in the coming weeks. Oil prices provide some support, but policy divergence, ongoing trade friction and already-priced Bank of Canada (BoC) hawkishness limit the scope for a sustained recovery.
• Markets currently price around a 60% probability of a BoC rate hike on 28 October, leaving the CAD exposed if expectations soften. Although headline inflation reached 3% in August, core inflation remains near 1.9%–2.0% and economic slack persists. The 19 October CPI report will be a crucial test.
• Oil is likely to remain volatile amid Middle East developments, while stalled US-Canada trade negotiations offer little immediate support. A stronger CAD recovery would require softer US data, firmer Canadian core inflation or a tariff breakthrough – none of which is currently our central case. 

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We expect AUD-USD to trade sideways in the coming weeks. The recent recalibration of the Reserve Bank of Australia (RBA)’s expected interest rate path has helped to support the AUD, with strong Q2 GDP and sticky core inflation in July reinforcing expectations of further tightening.
• Yet, additional hikes still appear underpriced. HSBC Economics sees two more hikes this year (including at the 29 September meeting), compared with market pricing of c10bp less. This suggests there may still be scope for rates-driven AUD support.
• This should continue to bolster the AUD’s carry appeal, as the Cash Rate is currently the highest policy rate in G10 and Australian government bond yields remain higher than elsewhere. However, despite positive domestic forces we don’t expect AUD-USD to overcome broad USD strength, which still retains a strong grip over the pair.

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• AUD-NZD will likely trade rangebound in the month ahead.
• A relatively high Australian cash rate, possible further RBA hikes and stronger carry appeal should provide some support for the AUD.
• The NZD remains vulnerable to renewed oil-price increases because of New Zealand’s high oil-to-GDP intensity however domestic data has remained resilient and the Reserve Bank of New Zealand (RBNZ) is priced to hike significantly.

Note: *Priced as at 10:49 HKT on 23 September 2026

Source: HSBC, Bloomberg

• We look for NZD-USD to remain steady in the weeks ahead. Although the broad USD retains a strong grip on the pair, this is beginning to loosen. Instead, rate differentials are beginning to discover more explanatory power.
• Doubts are emerging whether the RBNZ can deliver in line with market pricing – the central bank is still priced to hike by the most in G10 over the coming year. Yet with a cumulative 40bps priced across the next two meetings (Bloomberg WIRP), this is looking hard for the RBNZ to beat.
• Domestic data continues to be resilient despite the shock from the Middle East conflict – Q2 GDP slowed but by less than expectations, while survey data on the activity report continues to show positivity. Timelier indicators point to strong growth in Q3. The NZD remains exposed to a re-heightening of oil prices given its high oil-GDP intensity. 

Dovish 

Dovish refers to an economic outlook which generally supports low interest rates as a means of encouraging growth within the economy.

Hawkish 

Hawkish is typically used to describe monetary policy which favours higher interest rates, and tighter monetary controls to keep inflation in check.

MoM / YoY 

Month on month / Year on year

PMI 

Purchasing Managers Index (PMI) is an indicator of economic health of the manufacturing sector (>50 represents expansion vs. the previous month).

IMM data 

International Monetary Market (IMM) is a division of the Chicago Mercantile Exchange (CME) that deals with the trading of currencies and interest rate futures and options and the IMM data is part of the Commitments of Traders (COT) reports published by the U.S. Commodity Futures Trading Commission (CFTC). The IMM data provides a breakdown of each Tuesday’s open futures positions on the IMM. Speculative positions are a trader’s non-commercial positions (i.e. not for hedging purposes).

G10  

G10 refers to the most heavily traded, liquid currencies in the world: USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD, NOK, and SEK.

Fed / FOMC

Federal Reserve System (US’s Central Bank) / Federal Open Market Committee.

ECB 

European Central Bank (Eurozone’s Central Bank).

BoE 

Bank of England (UK’s Central Bank).

BoJ 

Bank of Japan (Japan’s Central Bank).

BoC 

Bank of Canada (Canada’s Central Bank).

RBA 

Reserve Bank of Australia (Australia’s Central Bank).

RBNZ 

Reserve Bank of New Zealand (New Zealand’s Central Bank).

SNB 

Swiss National Bank (Switzerland’s Central Bank).

Spot: Spot refers to the current market price of a currency pair that is important for immediate transactions.

50 dma: 50-day simple moving average number represents the average price of an index or a currency pair over the past 50 days.

Support (S), Resistance (R): Support and resistance are significant previous lows and highs plus retracement levels, based on historical price patterns of an index or a currency pair. Support is a historical price level where a downtrend of a currency pair paused due to demand for the first currency quoted in the pair increasing, while resistance is a historical price level where an uptrend of a currency pair reversed amid demand for the second currency quoted in the pair increasing.

HSBC Positioning Indices: The indicators have been devised to track the net position of momentum traders, looking at hundreds of strategies, operating over many different time horizons. It considers time horizons of 5 days up to 260 days. An indicator level of +10 would indicate that the hundreds of different strategies have all lined up and gone long (i.e., buy the first currency quoted in the pair). Similarly, an indicator level of -10 indicates that all strategies are short (i.e., sell the first currency quoted in the pair).
Tactical view where a currency pair is referenced (e.g. USD/JPY): An up (⬆) / down (⬇) / sideways (➔) arrow indicates that the first currency quoted in the pair is expected by HSBC Global Investment Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks.