Focus of the day:
"US Dollar: Bullish. While the recent pullback in US economic momentum casts a less obviously bullish outlook for the USD, we think the prospect for additional policy easing in the US' key trading partners stands in sharp contrast with the Fed's tightening bias. As such, we think the USD will remain supported going forward. Although the USD has strengthened already, we do not assess it to be materially overvalued historically. The less clear cut outlook for Fed policy could in our view result in less demand for longer dated optionality, resulting in a less bullish profile for implied volatility.
"Euro: Bearish. After a period of consolidation, we think EURUSD will revert to its downtrend as diverging monetary policy comes to focus between negative EUR yields and a hiking Fed. Moreover, we think outflows from the Eurozone will support the trend further. QE is likely to disrupt the domestic investor bias, diverting capital investment towards foreign currency denominated securities.
Japanese Yen: The recent consolidation in implied volatility, improvement in Japan’s BoP and Fed hiking expectations lead us to trim our USDJPY 3m forecast from 125 to 122. Nonetheless, we retain our 12m 127 forecast as the structural home bias of Japanese investors continues to unwind."
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