Brexit should make the global outlook gloomier and we adjust our FX views accordingly. We slash our GBP forecasts, lower our projections for the European G10 currencies, maintain our bearish view on G10 commodity block and keep an overall constructive view on USD.
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In the near-term, an uneasy calm may return to the markets as investors realise that the post-Brexit political vacuum may keep the market status quo little changed over the summer. The upcoming UK data will likely signal the beginning of the Brexit-induced slowdown. That said, barring an imminent downturn that will trigger aggressive BoE easing, GBP should not hit new lows just yet. We also cannot exclude a further short squeeze but doubt that investors will discount the Brexit risk to such a degree as to adopt a constructive view on GBP.
All told, we will look to fade any bounce in the currency and establish fresh shorts against USD and EUR, when we get closer to the BoE meeting on 14 July.
With Brexit fears taking a backseat for now, investors will focus on other risks and fundamental developments. We think that the best trades right now are relative value views without direct exposure to risk off and risk on. We are long AUD/NZD and USD/CAD via options, and believe that valuation, relative fundamentals more than market risk sentiment, should determine the performance of the trades. The upcoming general election in Australia and the July RBA meeting could support AUD.
Next week’s non-farm payrolls and Fed minutes will be key for risk sentiment, and the USD outlook. It would take constructive Fed minutes and a solid payrolls print (eg, a print above 150K) to see market sentiment recover further, and the USD regain ground against JPY and EUR. At the same time, disappointing US data could fuel fears about an imminent slowdown and risk aversion could rear its ugly head again.