G10: Important week ahead - BAML

Analysts at Ban of America Merrill Lynch explains that as FX investors continue to warm towards the EUR, the mood towards USD remains ambivalent.

Key Quotes

“FOMC Minutes triggered a dovish response, though overall markets largely continued in their previous trends. USD is weaker despite unchanged pricing for the June Fed meeting (or indeed for the rest of the year) and EM continued to perform. Focus now turns squarely to the upcoming US data, particularly core PCE, ISM and next Friday’s payrolls report. With a June hike 80% priced, any Fed commentary will be carefully parsed for clues that the Fed is comfortable with this pricing. With the blackout period looming, the Fed only has next week to push back against market expectations if they so choose.”

“The higher EUR theme was also broadly in place this week as data remained robust and following commentary from Chancellor Merkel that the currency is too weak. With the next ECB meeting fast approaching, and expectations that we will see a change in language signaling a hawkish shift already at the June meeting, next week’s Eurozone inflation data will draw increased attention. While positioning does not look stretched on a longer-term perspective, it is worth noting how sharp the recent position adjustment has been in EUR, suggesting some risks of tactical pullbacks.”

“Elsewhere, we remain bearish on JPY vs both EUR and USD, though the near-term outlook for USD/JPY is more uncertain. Both fundamentals and positioning also argue for long NZD/JPY. We are cautious on GBP, and feel the market consensus has turned too positive on Brexit. We are tactically short GBP, initiating a long EUR/GBP trade.”