USD Take-Off Postponed

With Fed's tapering of its QE programme postponed - now not likely until December in our view - the FX market has made a turn for a weaker USD. While the near-term support to USD has certainly waned since we published our September FX Forecast Update last week, we remain wary of calling off the 6-12M USD uptrend that we have been envisaging for a while. Indeed, we see the Fed surprise as mainly bringing out a level shift in USD crosses, merely postponing an eventual USD uptrend a few months but not reducing its pace materially. We emphasise though, that near-term USD risks are tilted to the downside.

We have upped the level of our EUR/USD forecast but kept a downward profile as indicated below. Note, however, that we have left all other crosses unchanged albeit the risks to the level of some USD crosses are now clearly for more USD upside than we have currently pencilled in. We will address this in our monthly forecast update mid October.

On a 1-3M horizon we acknowledge that delayed tapering provides a rather favourable backdrop for risk assets. With most markets having positioned for September tapering in recent months there is likely still room for some USD longs to be wiped out. Coupled with the fact that any geopolitical support to USD has waned, we now see EUR/USD at 1.33 (previously 1.31) in 3M time, but could see the pair reach 1.37 (1.31) in 1M should early October data out of the US prove disappointing.

In 3M we will be just beyond the December FOMC meeting which, if our economic projections prove right, means that Fed has laid out a tapering plan. This should induce a shift back in focus to the fact that the Fed will still be a first-mover on reining in easing among major central banks as US outperformance is set become a focal point. Furthermore, this should pave the way for a move in relative rates weighing on EUR. Notably, while our rate strategists see Fed as fairly priced at present, ECB hikes are seen too early in our view. Thus, we now see the pair at 1.30 in 6M (1.28), heading lower towards 1.27 in 12M (1.25).

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