Synopsis:

SocGen advises that major currency pairs like EUR/USD and USD/JPY are likely to consolidate in narrower ranges in the near term, as FX correlations to rate differentials and risk sentiment have weakened. However, they maintain a bearish medium-term USD outlook, encouraging investors to use this pause to hedge against renewed dollar weakness.

Key Points:

• Correlations Breaking Down:

  • USD’s inverse correlation to risk sentiment has weakened or even turned positive.

  • US economic expectations are increasingly detached from hard data, muddying FX signals.

• Short-Term View:

  • EUR/USD and USD/JPY expected to range-trade, pausing after recent volatility.

  • Markets await clarity on whether economic data will align with optimistic expectations.

• Medium-Term Outlook:

  • Further USD weakness is likely later in the year as macro fundamentals reassert themselves.

  • Foreign investment in US assets remains extreme, and gradual outflows are likely to weaken the dollar.

• Tactical Strategy:

  • Use this period of consolidation to hedge against the potential for renewed USD downside.

  • FX markets may enter a calibration phase before resuming trend moves.

Conclusion:

SocGen sees the current phase as a pause in FX markets, especially in EUR/USD and USD/JPY. Investors should not chase moves now but rather prepare for renewed USD weakness, particularly as foreign positioning in US assets begins to normalize.