Focus of the day:

"USD: Focus Returns to Fed. Bullish.

With risks from Greece and China diminishing, we believe that the market will once more focus on Fed rate hikes. In Yellen’s latest comments, she reiterated that the central bank remains data-dependent and flexible. With the market still pricing the first hike in six months, we see scope for this to be brought forward if US data come in on the strong side, boosting USD. We expect USD to continue to outperform.

EUR: Path Clear for Sell-Off. Bearish.

With uncertainty regarding Greece diminished, we believe that investors will feel more comfortable reinitiating EUR shorts, as evidenced by the latest break in EURUSD below the 100 DMA. Draghi has reiterated that the ECB stands ready to act if needed, which could be enough to weigh on EUR, particularly if it supports equities, given the inverse relationship between European stocks and EUR.

JPY: Still Look for Strength. Bullish.

We expect JPY weakness to reverse, and maintain our bullish view, despite the recent pick-up in equity markets. Recent data from Japanese pension funds point to the reallocation process being largely complete, suggesting that foreign outflows from Japan could slow. The latest developments in Japanese politics pose a risk to Abenomics, which could be a near-term source of support for JPY, though we believe that in the longer term this could be more concerning.

GBP: GBP Supported for Now. Neutral.

GBP has been an outperformer over the past week, driven by UK rate expectations. Carney’s comments concerning the timing of the first rate hike helped GBP to rally, and we expect to see continued strength in the near term. However, the bigger shift has been from Miles, who has been the long-time dove. This could be a reflection of the center ground at the MPC starting to shift towards the hawkish camp. The UK economic performance remains strong, and this should help to support GBP. 

AUD: A China Proxy. Bearish.

Watch: RBA minutes, CPI AUDUSD reached a six-year low this week on the back of fears surrounding the Chinese economy. Despite better-thanexpected Chinese economic growth data, AUD should continue to come under pressure as a result of persistently weak commodity prices and the significant terms of trade shock it is facing. The RBA minutes and the CPI print should both help to determine if the market should price in a higher chance of a rate cut. We remain bearish AUD."

Morgan Stanley picks the 3 major commodity currencies (AUD, NZD, CAD) as its technical FX chart of the week where MS is tactically and structurally bearish. MS provides the technical setups for these 3 currencies against the USD along along with the key targets for short positions.