US and particularly European stocks are not rebounding as quickly as Japanese stocks, but global risk sentiment is stabilising, leaving room for the currency market to realign with changes in rate differentials. The US dollar (USD) is in a substantially weaker position than 10 days ago and faces an imminent decline against pro-cyclical currencies, notes Francesco Pesole, FX strategist at ING.
The USD is in a weaker position than 10 days ago
“From a purely macro angle, markets remain cautious about any major risk rallies before the key US CPI risk event clears (next Wednesday). That said, a stabilization after the weekend’s big correction should be enough for most currency pairs to start reconnecting with rate differentials and fundamentals.”
“From this perspective, the dollar looks vulnerable. We think markets may be reluctant to take the Fed’s year-end policy rate much beyond 4.50%; that’s because 100 basis points of easing is likely tied to US macroeconomic data, with anything further (which has now been priced in) tied to expectations of some sort of intervention by the Fed to help the stock market.”
“That means the bounce in US 2-year OIS rates to 3.75-80% may struggle to find much further momentum, and the Dollar may be left with a near-term rate advantage around 40 basis points lower compared to just 10 days ago. We expect this to push the Dollar lower against most pro-cyclical currencies amid a possible further stabilization in risk sentiment and a lack of market-moving data this week.”
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
