Further gradual dollar depreciation but EURUSD in a tight range for now

While maintaining a bearish medium term view for the US dollar, we have downgraded our EURUSD forecasts for this year. We now see the pair trading broadly in a range of 1.10-1.15 for the remainder of 2019, a change triggered by the recent dovish pivot by the European Central Bank. In short, we think that the substantial downgrades in ECB’s growth/inflation projections alongside the dovish alteration in its forward rate guidance have increased the risk of interest rates remaining negative for longer. Despite fundamental headwinds to the dollar, we believe these developments have increased the hurdle for the common currency to appreciate meaningfully – at least over the next three to six months.

The shift in ECB’s stance and disappointing Swiss data suggest that the Swiss National Bank is highly likely to maintain (or even intensify) its dovish posture, something that should allow EURCHF to appreciate at a very gradual pace in the rest of the year. Turning to the JPY, recent USDJPY upside is clearly challenging our Yen-bullish view. However, USDJPY is now trading noticeably higher than what US yields would suggest and the maturity of the business cycle means that risk asset tailwinds are likely to abate. We continue to expect a return to USDJPY depreciation.

In the UK, our central scenario remains for a soft Brexit but we discuss alternative paths that could lead into such an outcome with different near term GBP implications. Medium term, we still expect a stronger pound as the hard Brexit premium is priced-out.

Turning to the Nordic currencies, we think the market is somewhat complacent regarding the monetary policy tightening cycle, especially in Norway. Above target inflation and strong fundamentals mean that the Norges Bank will deliver sooner than the market expects. This, together with strong oil prices, should propel the NOK higher in the rest of the year.

At the same time, the commodity FX bloc (AUD, NZD and CAD) has remained under pressure following dovish tilts by the Reserve Bank of Australia and the Bank of Canada. However, market expectations are building too fast in our view - investors for example now assign a 70% probability of two 25 basis point (bps) cut in Australia - and are likely to be disappointed. AUD and CAD should hold up well, especially in an environment where commodity prices remain supported and global trade data normalise.

Finally, in China, we reiterate our view that the CNY is likely to appreciate modestly over the next two to three quarters if the trade cease-fire is confirmed and domestic data stabilise.