Credit Agricole CIB Research discusses the USD 'smile' and the USD outlook for the coming week.

'We continue to believe that the USD smile – the analytical construct that links the USD outlook to the resilience of risk sentiment and the level of US rates – should remain a dominant template for the FX markets. The ‘USD smile’ would suggest that the USD need not lose ground even if we see risk sentiment rebounding on the back of growing market hopes for a US-Iran peace deal. This is because the USD should benefit from returning demand for FX carry trades and unhedged inflows into the US stock markets, fuelled by growing market risk appetite," CACIB notes.

"Looking ahead into next week, focus will be on the Core PCE deflator for April, which is still the Fed’s preferred measure of inflation. In addition, FX investors will focus on Conference Board consumer confidence index for May and the durable goods orders for April. We will also hear from the Fed’s John Williams. While the USD could suffer from any sustained improvement of market risk sentiment, we doubt that the currency would embark on a downtrend. Indeed, easing market fears and fading geopolitical risks could help investors focus on the incoming US data releases and their (positive) impact on US rates and thus the USD," CACIB adds.