From the FXWW Chatroom: Our view:
– We anticipate an extension of recent weakness in USD. Data and speeches over the weekend provide little ammunition for investors to move to price in additional tightening by the FOMC and this may leave the market vulnerable to further USD-negative consolidation in short-term positioning. The consumer price reading failed to validate the stronger average hourly earnings, while Chairman Yellen stressed a steady course but cited likely hurricane impact on the data and that prices had been surprisingly soft. Combined with the lack of immediate momentum towards fiscal stimulus in the US and uncertainty on President Trump’s selection for the next Fed Chair, this may limit the extent to which the US can participate in any rises in global yields.
– With limited data flow this week, the focus may shift back towards US politics. Many investors are likely discounting a move by the Senate to pass its budget resolution as soon as this week. However, given the thin margin for Republicans in the Senate, the ongoing divides within the Republican party, questions over the details of the reconciliation instructions and recent strains between legislators and the White House there is some risk that this process could be slowed or temporarily derailed fueling USD-negative disappointment.
– We suspect this will be associated with a further unwinding of USD longs among short term investors. Our flow analysis shows a surge in USD buying from the leveraged sector in recent weeks, with momentum exceeding that seen at any point in more than a year. This has begun to trail off in recent days, but cumulative (four-week) flow remains in positive territory and there is likelihood that investors will have more to unwind. With expectations on US monetary and fiscal policy in a holding pattern, the brief pause in global convergence trade motivated real money USD selling could revert to trend.
– GBP should represent an attractive target for USD
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