Trump Trade: Momentum Building
The Trump trade is gaining traction, with odds continuing to move in his favor. ING notes that the euro is not yet reflecting a Trump victory risk, meaning there is still room for adjustment.
- Short EUR remains a key trade if Trump’s odds improve further.
- Possible pre-election deleveraging into USD, as markets position defensively.
- However, it’s possible that Trump trades have reached full participation in the short term, and it could be likely for the market to consolidate this week as traders wait through a quiet data calendar with little new election-related information.
USD: Strong But Wait for Now
USD remains supported, with neutral positioning leaving room for further longs. The biggest near-term risk to dollar strength is Wednesday’s Fed Beige Book, as many believe the last weak release prompted the FOMC to start with a 50bp cut in September. This release will be closely watched.
- DXY likely to stay bid in the 103-104 range.
- 10-year yields remain elevated, reflecting a hawkish repricing of Fed expectations.
- Fed speakers have been cautious this week about committing to further easing.
EUR: Under Pressure
CFTC remains slightly increasingly short, reflecting ongoing concerns about economic weakness. Markets are pricing in significant ECB easing, and Thursday’s Eurozone PMIs will be critical in determining if those expectations are justified or need to be adjusted.
- EUR/USD likely to remain in the 1.08-1.09 range, unless PMIs show an unexpected rebound.
- PMIs now have greater weight in ECB decision-making. Lagarde surprised some last Thursday by elevating the importance of the PMIs in ECB decision-making.
- The wide EUR-USD rate differential keeps EUR selling pressure intact.
GBP: More Room for Dovish Repricing
Sterling remains vulnerable, with the previous extremely long positioning still being unwound. There is still room for the market to reprice the pace of BoE easing, and Thursday’s PMI data will be a key test.
- GBP/USD 1.30 level looks vulnerable if PMIs disappoint.
- Potential dovish BoE rhetoric could weigh on GBP.
JPY: Political Risks Above 150
USD/JPY remains balanced, but political risks become a factor above the 150 level. This remains a key area to watch for potential intervention or shifts in sentiment.
AUD: Trump Risk Hedging
There is some evidence of AUD being used as a hedge against Trump risk, given its China exposure. However, positioning remains mixed, and broader risk sentiment will likely determine near-term direction.
Key Events This Week
- Fed Beige Book (Wednesday): A major risk for USD. If soft, it could fuel further rate cut expectations.
- Lagarde speaking to Bloomberg TV (Tuesday) and ECB Chief Economist Philip Lane (Wednesday): Any dovish signals could weigh on EUR.
- Eurozone PMIs (Thursday): Elevated importance after Lagarde’s recent comments. Unless there is a strong recovery, EUR/USD should stay under pressure in the 1.08-1.09 range.
- UK PMIs (Thursday): Will determine if GBP continues to outperform or succumbs to dovish BoE rhetoric.
Leave a comment