Forex overview. US Dollar Outlook Hinges on Trade Talks, CPI and Treasury Supply – ForexNews.PRO
Currently, financial markets exhibit a generally optimistic outlook. Global equities, as measured by the MSCI world equity index, are reaching record highs, while investors are tempering their expectations regarding the extent of future monetary easing. The US and China are engaging in trade discussions in London today, a factor that should promote stability in the risk environment and bolster the dollar’s position.
USD: Trade Talks Expected to Favor the Dollar
Since the implementation of US President Donald Trump’s tariffs in early April, the prevailing market narrative has centered on the potential adverse effects of these tariffs on the US economy and the dollar. Consequently, the scheduled meeting between US and Chinese officials in London is anticipated to have a positive impact on the dollar.
The assumption is that both nations wouldn’t meet without the belief that a resolution can be achieved. The primary focus will be on solidifying the agreement reached in Geneva last month, ensuring that tariffs of 100% or more do not resurface.
This backdrop coincides with the MSCI world equity index reaching historic peaks and investors displaying an optimistic view of the global landscape. This has led to a slight decrease in traded FX volatility levels, even amidst near-term tariff-related risks in early July. Diminished volatility is also fostering increased interest in carry trades, where Latin American currencies with high implied yields (9-14% per annum) are gaining appeal.
The US bond market could potentially pose the greatest threat to this stable environment this week. A substantial 119billioninTreasuryissuanceisscheduledforTuesday−Thursday(58 billion in 3-year notes, 39billionin10−yearnotes,and22 billion in 30-year bonds). Subpar auction results or a surprisingly large May monthly budget deficit (released Wednesday evening) could easily inject fiscal risk back into US asset markets, leading to a rise in risk premiums.
The May CPI release on Wednesday, with an expected core reading of 0.2% month-on-month, is the most significant data point this week. No Federal Reserve officials are scheduled to speak, as the blackout period preceding the June 18 FOMC meeting is in effect.
Due to the Whit Monday holiday in Europe, FX trading may experience reduced activity. However, the existing speculative short dollar positioning could lead the DXY to approach the 99.40/50 range, anticipating positive developments from the US-China trade talks.
EUR: ECB’s Optimism
The euro has demonstrated resilience following the European Central Bank meeting on Thursday. President Christine Lagarde portrayed a positive outlook for eurozone growth, despite global uncertainties. The market continues to price in just one more ECB rate cut, expected in December. Increased attention on German fiscal stimulus when the new budget is released later this month should continue to provide support for the euro.
Our recent EUR/USD poll, conducted last Tuesday, revealed a strong consensus. In this poll, 57% of respondents anticipate EUR/USD to end the year in the 1.15-1.20 range. Our current baseline view is an ongoing 1.10-1.15 range this year. Nevertheless, the risk to our baseline EUR/USD view is clearly to the upside.
Key events on the eurozone calendar this week include the release of the eurozone wage tracker on Wednesday and a series of ECB speeches.
Expect EUR/USD to trade within Friday’s 1.1370-1.1455 range, given today’s European holiday.
