Barclays Research discusses the USD outlook in light of the latest batch of adjusting its FX forecasts last week. Barclays has moderated the path of EUR/USD to flat in the next quarter and a low of 1.08 (previously 1.06) in Q2 2020.
"While we still expect the Fed to ease in the face of persistently low inflation, sizeable external risks and a moderation of US growth, we think the intensity of cuts and the risks to the path have moderated. An indefinite suspension of further US tariffs and technology sanctions on China – and likely retaliation – imply a modestly better growth path for both economies and for connected trading partners, reducing risks to the global economy. The dominant feature of our prior forecasts was a small near-term depreciation of the USD due to a more aggressive path of Fed rate cuts, but a much stronger USD next year as the US economy rebounded more rapidly because of policy easing and a rising risk premium on non-US currencies (other than the yen) as growth elsewhere continued to languish," Barclays argues.
"The shift in the outlook suggests a moderation of both views. We now see a more persistent but shallower path of USD appreciation, as there is less negative bite from US interest rates in the near term and less of a rise in non-US risk premia, given the improved global outlook," Barclays adds.