USD-Decoupling Or Just Risk-On; Sell EUR Rallies - Credit Agricole

USD-Decoupling Or Just Risk-On; Sell EUR Rallies - Credit Agricole

3 March 2016, 15:34
Vasilii Apostolidi

On the whole, we think that the USD-decoupling trade should remain the biggest beneficiary of the latest improvement in market risk sentiment. Indeed, we think that the US recovery continues and that it could accelerate from here, and that should keep the Fed on course to hike twice this year.

The USD should gain more ground as markets front load rate hike bets ahead of the March FOMC meeting. Indeed, we expect that the combination of improving US data as well as the relatively easy financial conditions in the economy will allow the Fed to maintain its constructive outlook on the economy and signal further gradual tightening from here.

The EUR remains relatively offered. This is due to both, firm expectations of the ECB considering more aggressive policy action next week and stabilizing risk sentiment. Keeping in mind that inflation in February surprised lower and that price expectations as measured by 5y inflation swaps remain close to multi-year lows, such prospects appear likely. However, it must be noted too the ECB will have to respond to the view that a more aggressive policy stance may have negative implications to the banking sector.Nevertheless, we remain of the view that the single currency should be sold on rallies.

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