USD, EUR, JPY, GBP, AUD: Outlooks For The Coming Week - Morgan Stanley
"USD: Cautious Correction. Bullish.
We now expect a tactical correction in the USD strength, before a resumption of the bullish trend. We expect some profit-taking on long USD positions, especially as positioning is somewhat stretched. That said, we think we are only halfway through the USD bull cycle, and expect the uptrend to resume after a few weeks.
EUR: A Tentative Pause. Bearish.
We believe EUR could see something of a correction, as positioning is stretched and data have improved somewhat. Signs of reflation and green shoots in the region should support the currency. The main risk for EUR is Greece, where the ECB’s decision to stop accepting Greek government debt as collateral has escalated tensions in the region. While we expect a resolution, this heightens risks for the currency in the near term.
JPY: Room for Rallies. Bullish.
We believe JPY could see some support over coming weeks from three fronts. First, we expect a broader USD correction, and JPY should also see support in this. Second, rising political tension in Greece could lead investors to consider hedging against a larger risk-off scenario. Third, while the newest central bank appointee is likely to take a dovish stance going forward, we think that initial signs of reflation globally could boost JPY.
GBP: Inflation Report in Focus Bearish.
We still expect GBPUSD to reach 1.38 by the middle of the year but look for higher levels to sell at, given the risks building for a bit of a USD correction. The focus this week will be the BoE’s Inflation Report, which the market is likely to expect to be dovish, given the recent low CPI print (below 1%Y). Markets will be focused on whether the report suggest that the BoE will keep rates on hold for a bit longer, given the low inflationary environment.
AUD: RBA Enters the Lowflation Battle. Bearish.
Following the RBA’s surprise cut, we have revised our AUD forecasts lower, as we now expect further monetary easing from the central bank – our economists now look for 50bp of cuts in the first half of the year. We also see downside risks to iron ore prices, which should weaken AUD terms of trade further, weighing on the currency. Finally, the central bank has expressed a bias for a weaker currency."
