When it comes to the EUR, we stay of the view that rallies should be sold. This is regardless of cross market volatilities remaining high and mainly due to the notion that monetary policy expectations will become a more important currency driver anew. Even if the ECB is unlikely to consider additional policy measures as soon as this week, we do not exclude that central bank President Draghi will consider a more dovish rhetoric. This is especially true as weak commodity price developments, a stable currency and broadly unchanged growth momentum should have increased downside risks to inflation.
When it comes to the US, we believe that the USD should stay a buy on dips. Although Friday’s weaker than expected retail sales release suggests more muted domestic demand conditions and although this may be reflected in even further falling inflation expectations, there appears to be limited room of further falling Fed rate expectations in the short-term. This is especially true when considering that 12m rate expectations fell considerably over the past few weeks and that Fed’s Dudley more or less reiterated on Friday that the growth outlook has barely changed since December.
This article originally appeared at eFXnews.