- Inflation data, a potential win-win for the dollar (USD)
- The euro (EUR) unable to advance further
- Currency wars are back on the agenda
Foreign exchange analysts at Morgan stanley continue to recommend buying the US dollar if it falls. In this context, he considers that the weakness of the United States following Friday’s employment report should be seen as a buying opportunity.
“We suggest investors use Friday’s decline in the US dollar following the May payroll report to add exposure to the dollar.”
The bank admits it could be early on the call amid weak dollar sentiment in the markets, but recommends selling the euro-dollar exchange rate (EUR / USD) with a target of 1.1700.
Inflation data, a win-win potential for the dollar
The latest US inflation data will be released on Thursday and Morgan Stanley expects weaker and stronger data to support the dollar.
Further upside surprises in US inflation would likely lead the market to assume that the Fed is putting a little more emphasis on inflationary pressures and causing a hawkish turn.
If the data is weaker than expected, markets would tend to downplay inflation fears, which would put upward pressure on real yields and support the US currency.
Bank of America (BoA) expects real rates to rise in the third quarter as the Fed’s language gradually becomes more hawkish; “We continue to forecast EURUSD at 1.15 and USDJPY at 113 by the end of the year.”
The euro unable to progress further
The bank notes that the EUR / USD rate has stagnated despite generally favorable headlines and this lack of progress suggests that traders and hedge funds have already anticipated a strong recovery in the eurozone.
“The euro has not risen against the US dollar in the past two to three weeks despite strong data and positive headlines from the region suggesting that investors are already positioned for the story of the European recovery. “
The bank also notes that investors are positioned strongly against the US dollar, which will maintain the possibility of a US rebound.
Nevertheless, he considers the risk that the dollar will remain vulnerable in the very short term given this negative sentiment.
BoA also notes the short-term risks that dollar weakness will continue; “We recognize that there is an air pocket over the next month where the Fed will not signal ‘further substantial progress’, real rates remain deeply negative and the market may test technical support levels important for the DXY index. “
Currency wars are back on the agenda
Morgan Stanley expresses only limited optimism about the dollar, but expects central bank stocks elsewhere to support the US currency in relative terms as well.
The bank expects the ECB to maintain an accommodative stance; “In recent months, the ECB has tried to send a conciliatory message to the markets and the coming week’s meeting will be no different.”
He also expects other international banks to resist currency gains, limiting the possibilities of currency gains against the dollar.
In particular, he notes that the Chinese central bank has pushed back the gains of the Chinese yuan.
According to Morgan Stanley; “We expect central banks outside the United States to take action to prevent dollar weakness from accelerating further.”
In contrast, Goldman Sachs expects dollar losses to persist; “The combination of stable Fed expectations and a growing global economic recovery should allow recent dollar weakness to continue. Our preferred expression remains EUR / USD long, with a target of 1.25.