Credit Agricole CIB FX Strategy Research notes that after the political storms in Washington and abroad, this week will offer a chance to refocus on economic fundamentals.
In particular, CACIB argues that with the US 10Y yield managing to hold and bounce off the critical trendline support of around 2.13% the market could be better positioned for a reassuring Fed message on Wednesday.
“We expect a hike and a largely unchanged dot plot which should give some room for US rates to rebound further. This could be reinforced if the Fed gives an indication it is moving closer to the tapering of balance sheet reinvestment, which could start as early as September.
As for the data this week we suspect the CPI may not show any rebound and core inflation could indeed slow even further but a firm retail sales report would at least offer hope of stronger price pressures down the road,” CACIB adds.
All in all, CACIB expects a moderate USD rebound (e.g. USD/JPY to the mid-May high of 112) if the Fed meeting unfolds close to CACIB’s economists’ expectations.
USD/JPY is trading circa 110 as of writing.
Source: Credit Agricole CIB Research
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