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USD: BofAML call sell, Citi discusses USD outlook

USD: Any USD Firmness In Next 1 To 2 Weeks An Opportunity To Sell Over Summer

Bank of America Merrill Lynch Global Research discusses the USD outlook in light of this week’s several important dovish changes to the FOMC statement.

“The Fed left rates on hold but sent a clear message – the next move is a cut. The only question now is the timing. Our baseline is for the Fed to begin cutting in September, delivering 25bp of easing but see risks as skewed toward an earlier and larger cut. It will be a function of the data and financial conditions – if we get another weak payroll report, disappointing ISM surveys and a bad outcome from the G20, the Fed will likely be inclined to cut in July. If the data are mixed and markets are content, the Fed will likely continue to “monitor” and wait until September,” BofAML notes. 

“We continue to think that Fed easing will eventually pull USD lower. We believe that any additional USD firmness over the next 1-2 weeks will set up for a sell opportunity over the remainder of the summer. A key risk is the upcoming G20 meeting, into which we see risks as bimodal. An unexpectedly bad outcome to that event – or the market pricing associated pessimism beforehand – could provide additional temporary support to USD,” BofAML adds.

USD: Market Reacted Dovishly To June FOMC; Base Case Still Sees No Fed’s Cuts In 2019

Citi Research discusses the USD outlook in light of yesterday’s several important dovish changes to the FOMC statement.

Citi analysts note that the market has reacted dovishly to the June FOMC. But while the statement and dots keep cuts as early as July squarely on the table, the outcome does not change Citi’s base case for “no cuts in 2019” – which Citi analysts note also remains the base case of a slim majority of Fed officials. The statement removes “patient” to replace it with “closely monitoring” conditions – this likely signals that the committee will cut rates should downside risks to the outlook materialize. Citi analysts also say that should the Fed cut, the most likely scenario is a 50bp cut in July and an early end to balance sheet reduction,” Citi notes. 

“Citi analysts also remind us that the greenback tends to weaken in the 1-2 months heading into the first cut of the cycle. With positioning relatively light, the trend is unlikely to change this time around and there remains further room for tactical USD weakness should the Fed gear up for action,” Citi adds.