EUR/USD to bear the brunt of adjustment

TD Research discusses the USD outlook and thinks that the USD index 'DXY' may have a tactical turn higher soon.

"The ECB will remind markets this week why the EUR remains the funder of choice. Meanwhile, the Fed is likely to cut next week but the outlook for more cuts is less assured. On a HFFV basis, the index is running nearly 1.5% cheap, right at the 200dma. EURUSD is likely to bear the brunt of the adjustment," TD notes.

"The market is also priced for a Fed cut next week (which we agree with). Less obvious is the optionality presented by Powell for future policy shifts however. While we do not think that Powell will be quick to completely close the door to support the economy with more cuts, we think it is far more likely they he (and the Committee) opt to wait and see how the data unfolds after delivering 75bps of cuts and trade talks have pivoted towards a more positive footing. This could serve as the basis for a tactical turnaround in the USD," TD adds.

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