Synopsis:

Credit Agricole believes the recent USD rebound may have exhausted the short-covering rally, but sees room for further near-term support against low-yielders like JPY, CHF, and EUR, especially as US stagflation fears fade and rate expectations stabilize.

Key Points:

• Short squeeze fading: The USD’s rally has stalled, suggesting the unwind of speculative USD-short positions is likely complete.

• Fed rate cut expectations steady: Softer US CPI data this week confirmed market expectations, leaving limited scope for further re-pricing of the Fed policy outlook.

• Shift in investor focus: With positioning and policy repricing done, investors may now turn to the quality of incoming US macro data and Fedspeak for further directional cues.

• Support vs low-yielders: Despite the broader consolidation, USD could stay firm versus JPY, CHF, and EUR, as these remain funding currencies and less attractive in an improving US macro backdrop.

Conclusion:

While the technical impulse behind USD gains may be waning, Credit Agricole sees fundamental support persisting near term, particularly against low-yielders, as the market digests softer inflation, stabilizing rate views, and abating US stagflation concerns.