Weekly: FX – Currency markets position for a more dovish Fed

by: Georgette Boele , Roy Teo

Last week, sentiment in financial markets further improved. The USD fell under pressure for several reasons. Safe haven flows that supported the USD before were easing. In addition US yields moved sideways failing to provide support to the USD. Moreover, the USD has lost some cyclicality recently reflected by a lower (even negative now) correlation with the Dow Jones. This is merely a reflection of market expectations of a gradual reduction in monetary stimulus by the Fed this week. So in a way the market is now positioned for a dovish sounding Fed announcing a small decrease in bond purchases and an adjustment in the unemployment threshold downwards. This USD reaction is similar to those we have seen in the past when the USD was out of favour in a risk seeking environment because of a dovish Fed. We expect US economic data to start to surprise on the upside again, which will make the USD more cyclical again. We therefore keep our forecast for 1.20 in EUR/USD at the end of this year in place.

 

Weekly FX 16 September 2016 – currency markets position for a more dovish Fed