A Floor Below USD At Current Levels; Buy Dips

Risk sentiment has been improving further in Asian hours, still on the back of capped Fed rate expectations. Yesterday’s weaker than expected ISM services PMI fuelled investors’ expectations of the Fed refraining from tightening monetary policy this year further. Even if the latest data has decreased the probability of the Fed considering higher rates this year, December should remain an option. This should hold especially true if risk sentiment continues to stabilize in the weeks to come. It must be noted too that inflation expectations as measured by 5y forward breakeven rates failed to break lower of late.

As a result to the above outlined conditions we see limited scope of further falling Fed rate expectations from the current levels. This in turn should put a floor below the greenback at around the current levels, in particular against the EUR.

This is especially true as muted Eurozone growth and price developments have increased the risk of the ECB considering a more aggressive monetary policy stance soon.

Ahead today it will be quiet in terms of data releases. If anything, US trade data and Canada’s Ivey PMI will attract attention. View wise we stick to a positive USD view. As stressed above we anticipate only limited room of further falling Fed rate expectations from the current levels. This combined with the ECB’s or SNB’s more dovish monetary policy stance should keep the greenback a buy on dips.

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