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Aug 09 - 12:55 PM

USD: Inflation: Is The Glass Half Full Or Is It Half Empty? What Does It Mean For EUR/USD - Danske

By eFXdata  —  Aug 09 - 12:00 PM

Danske Research discusses the USD outlook and tomorrow's US CPI print for the month of July.

"Is the glass half full or is it half empty? Headline CPI inflation likely eased to around 0.2- 0.3% m/m in July, while core inflation remained elevated around the 0.5% m/m level. Even if inflation turned out lower than expected in July, we think the body of evidence justifies staying the course of swift monetary tightening," Danske notes. 

"Hence, we see potential for the Federal Reserve to raise interest rates by more than what the market discounts and in particular on a 3-9M horizon. In contrast, we think the market discounts too many interest rate increases from ECB over this period. Hence, we see upside potential to EUR/USD FX swaps. Besides tighter monetary policy, the USD feeds off the positive energy terms of a trade shock to the US economy. As the heating season begins in a couple of months, US LNG exporters sit on the winning end of Russia’s threat to shut down natural gas exports to the EU. Consequently, we are confident in our call for EUR/USD to drop back below parity over the coming months. We forecast EUR/USD at 0.95 in 12M," Danske adds.

Source:
Danske Research/Market Commentary

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