Danske Research discusses the USD outlook and notes that the big question for investors is whether the Fed is ready to blink and move towards dovish market pricing after the service sector has started to bend.
"There is nothing to suggest, when looking at forward-looking indicators, that we are in for an imminent turnaround for the better in macro data.
Rather, it looks like weakness in PMIs could continue for some months. The question then becomes when this deterioration in data, coupled with optimistic but weakening sentiment in financial markets and declining inflation expectations, will be enough for policymakers to break with the recent string of policy inaction," Danske notes.
"To reverse towards a more risk-friendly forecast we are particularly focused on three things: 1) Signs the Fed will shift focus to create a global reflation story (maybe via cuts). 2) Looking at industrial metal prices to gauge the direction of Chinese policy easing. 3) The direction of EU and US inflation expectations.
A turning point in (1)-(3) and likely combined with a LATAM turning point in FX would be our trigger to position for a change in the outlook.
In broad USD terms (including EM), we think the potential in a reversal aligned with the turning points of (1)-(3) is a broad USD weakening in the size of 5-10%. This would be a trigger for a move higher in EUR/USD towards our 6M and 12M forecasts of 1.15 and 1.17," Danske adds.