Commentary from Credit Agricole on the week ahead
Risk sentiment has been stabilising for most of the week, mainly in reaction to easing worries related to Asia. Even if China-related growth expectations may turn sour anew, investors' focus turned to next week's Fed monetary policy announcement.
Against market consensus, our economists expect the central bank to refrain from tightening monetary policy ahead of the October meeting. This is due to heightened global growth uncertainty and inflation expectations close to multi-year lows. However, even if the Fed were to keep its powder dry, central bank Chairwoman Yellen should consider a more hawkish rhetoric during the press conference in order to prepare for a lift-off later this year.
This suggests that the greenback is unlikely facing any sustainable downside risk even in the case of unchanged rates.As a result of the above outlined conditions we remain in favour of buying USD dips, for instance against the CHF and JPY.
Elsewhere, the GBP will stay in focus, after the BoE indicated that Asiarelated tensions did not alter their stance on monetary policy. Next week's data should confirm constructive domestic conditions to the benefit of rate expectations. Accordingly we stay short EUR/GBP.
EUR upside should prove limited from current levels as the ECB will be keen to prevent the currency from appreciating further to dampen inflation expectations also.
Meanwhile we expect no surprises from the SNB and BoJ. However, inflation being well below target should increase the probability of the BoJ considering additional policy action later this year. From that angle JPY upside should remain limited even if risk aversion were to rise.
What we're watching:
FX Focus - Past Fed lift-offs and USD: should we buy or sell? Should the Fed hike rates next week, the USD is unlikely to face a sell the fact reaction.
USD - Focus turns to Fed. Even if the Fed refrains from tightening monetary policy next week, USD downside is likely to stay limited.
GBP - Busy data week. Next week's data should confirm constructive domestic conditions to the benefit of BoE rate expectations and the GBP.
CAD - Inflation data due. Regardless of inflation stabilising, we remain in favour of selling CAD rallies.
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