It is a difficult task for the US central bank to implement a rate hike cycle over more than two years without the market pricing it in accordingly.
However, our Fed watchers have a strong argument: as Fed maintained dovish stances in monetary policy considering prevailing economic developments in the recent times, the strategy of the US rate policy being data dependent will maintain sufficient uncertainty medium term, preventing a rate hike cycle from being priced in.
That means I can project a USD development that is likely to be pretty close to the Fed’s ideal: only moderate USD strength despite relative (compared with market expectations) speedy rate hikes.
As far as the hedging of EURUSD risks is concerned the change in forecast implies less than the notable change of the numbers in the table suggests.
The Fed signals are more volatile than ever. And that also means: the medium term EURUSD outlook can change more quickly than usual.
Fed's hiking cycle is still on table.
Draghi baffles by making following points:
QE measures deemed effective, says there are risks that could undermine recovery path, Emerging markets exposed to abrupt shift in risk sentiment, Ensuring resilience of euro economy is 'paramount'.
June 23 referendum poses the latest challenge to Europe’s 368 billion-euro market, which has been in decline since 2007.
We argue that the EUR is underpricing the potential economic disruption related to Brexit and shorting EUR/USD is a cheaper way than shorting GBP/USD to hedge for such a possibility.
If the UK does exit the EU, we think it is unlikely to only affect the UK, it will likely affect the Eurozone also through both direct and indirect channels.
The vol spread between GBP/USD and EUR/USD is at historically high levels.
However, we reckon that EUR may also abate when the market happens to be more disturbed about the probable proposition of Brexit ahead of the referendum and potentially weaken more if the UK does exit the EU.
The material has been provided by InstaForex Company – www.instaforex.com