A December Fed cut is back as a baseline scenario for markets, but the dollar has remained relatively strong. Our short-term valuation metrics point to significant risks of a USD correction, unless data prompts a hawkish repricing. Geopolitics will remain in focus, both for European FX (Ukraine peace talks) and the yen (Japan-China tensions over Taiwan)
After a couple of months of stability, we look for the dollar bear trend to resume into year-end. EUR/USD should be trading up at 1.20 by that stage after three Fed rate cuts. Even though valuations look stretched in equity and credit markets, we still prefer a benign decline in the dollar and a supported environment for risk assets and activity currencies
Quiet start to Tuesday with G10 FX trading in tight ranges against the USD, US equity futures flat while USTs are weaker, led by the back-end. Reports suggest that India could cut its tariffs on US imports to avoid April 2 measures, following Trump's headlines on Monday on a potentially softened and/or targeted approach.
A strong finish to last week by US equities helped buoy investor sentiment at the start of this week in Asia. Upside surprises in China’s cyclical data also helped boost investor sentiment. Holding back sentiment, however, were US Treasury Scott Bessent suggesting the recent US equity market rout was a healthy correction and weak Chinese house prices data showing the sector was still in a slump.
The SEK remains the G10 FX outperformer MTD, although the NOK and EUR have closed the gap to the top this week. Of special note, EUR/SEK has failed to extend the multi-year lows reached a week ago in spite of EUR/USD having rallied past last November’s peak of c.1.0937.
