In its weekly FX note to clients, Morgan Stanley discusses the USD outlook going into next Friday's non-farm payrolls report, and the EUR outlook heading into the due date of Greece next repayment to the IMF which is also on next Friday June 05. The following are some of the key points in MS' note along with its latest EUR/USD forecasts.
US Data Turning the Corner. "After a soft first quarter, US economic data have been rebounding nicely in Q2. A surge in housing activity should remain supportive of the economy and continue to exert upward pressure on core prices in the US. Should the data remain firm, as we expect, there is scope for further USD upside given the clean positioning in the market," MS projects.
USD into NFP. "Next week’s non-farm payrolls number is especially important in this regard. Further solid employment gains are likely to prompt the market to re-price current sanguine expectations for Fed tightening. This is key to the USD outlook, as our research has shown that it is the front end, rather than back end yield differentials, which matter for the dollar," MS adds.
Greece Crisis. "The market focus is now on the next repayment due to the IMF on June 5. Negotiations look set to go down to the wire. Without an agreement, Greece will struggle to make the upcoming IMF and ECB loan repayments," MS notes.
Crunch Time For EUR. "At this point, political decisions would have to be made regarding whether Greece goes into default, which would have far-reaching implications, and potentially pushes Greece closer to the exit from the euro. Hence, the risk factors for EUR from Greece are increasing, in our view. We expect to see EUR returning to its longer-term downtrend, and negative news regarding Greece could accelerate this trend," MS projects.
Higher Volatility. "In previous research we have highlighted the impact on EUR from the main Greek scenarios – namely an EMU exit (the most bearish case for EURUSD in our view, targeting 0.82) and a compromise deal under the staycation scenario (a more bullish scenario)..We maintain our bearish EUR view on a Grexit scenario, but with the market split on its interpretation of the implications for EUR, we believe that volatility is likely to increase further," MS adds.
EUR/USD forecasts:
MS maintains its EUR/USD forecasts at 1.04 by Q2-end, 1.03 by Q3-end, and 0.98 by year-end
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