It's possible that the deficit actually becomes a positive factor for the dollar as people see it narrowing. That will allow the dollar to rally even as growth in the U.S. slows down and the Fed stops raising rates.
Some of the risks associated with rate cuts have dissipated for sterling. We expect rates to remain on hold as the economic picture in the U.K. stabilizes.
It's wrong to assume that the dollar will start to fall as the Fed stops raising rates. What we could see is a transition to a structural support for the dollar as the trade position improves.
Any significant weakness in the housing data would be dollar negative suggestive of a slowing economy, thus reducing the amount of monetary tightening required from the Fed.
There was an observable extreme in market sentiment.
