FX Viewpoint: USD strength on improving fundamentals
12 October 2026
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HSBC prepared this video based on the information that it believes to be reliable at the time of shooting. However, the FX market moves very quickly and the views presented in the video may no longer be up-to-date and are subject to change without notice. The content of the video does not constitute a solicitation nor recommendation for any transaction or making any deposit or investment. Please contact your Relationship Manager for our most updated FX views and publications.
Key takeaways
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The USD outlook has improved on stronger US data and reduced Fed uncertainty.
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A less aggressive Fed may limit gains but could still leave the USD strong against the EUR, GBP and JPY.
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Policy uncertainty and fiscal risks may cause volatility, but we still expect the USD to strengthen gradually.
The USD is in a markedly better position than it was only a month or so ago, when weaker US economic data, a negative focus on rising Treasury yields and uncertainty over Federal Reserve (Fed) policy had undermined confidence.
We assess the USD through cyclical, structural, and policy uncertainty factors, all of which are now more supportive. US economic data have surprised to the upside again, concerns over the Fed’s communication have eased after its latest policy meeting, and fiscal concerns have moderated relative to challenges elsewhere.
The main question is how far the Fed will raise interest rates. The two-year Treasury yield, which reflects policy expectations, has risen steadily since February, supporting the USD. Markets now price in around 85bp of hikes by October 2027, while HSBC Economics expects only one further 25bp increase. If the Fed tightens less than expected, USD gains could be more limited, but may still outperform the EUR, GBP and JPY if their central banks also deliver less than anticipated.
A slower US tightening cycle could also provide some relief to more cyclical currencies, such as the AUD, and to emerging-market currencies as a whole.
Fiscal credibility concerns are also affecting other major economies. French and Italian government bond spreads versus Germany have widened, while UK markets remain sensitive ahead of the 28 October Budget. These challenges may help keep the USD supported against the likes of the EUR and GBP.
The US midterm elections could introduce additional volatility. The USD weakened after the 2022 elections alongside falling US Treasury yields, but history may not repeat itself. The relationship between the USD and different components of Treasury yields has changed, making the election impact difficult to predict.
We expect the USD to continue grinding higher, although the pace may be modest and sensitive to Fed policy, Treasury yields and political developments.
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