Morgan Stanley fundamental Forex analysis

12 July, AtoZForex For the benefit of traders, Morgan Stanley has shared this week’s fundamental Forex outlook providing data expectations and key market focus.

Morgan Stanley weekly fundamental Forex analysis

The following is Morgan Stanley weekly fundamental Forex analysis for USD, EUR, and GBP single currencies.

USD: Lower for now – Bullish

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“We expect USD will weaken in coming weeks as low US yields and a better risk environment support carry trades and commodity currencies,” Morgan Stanley pointed out.

The June FOMC minutes and Fed Dudley's remarks suggest the Federal Reserve is largely okay with current market pricing, leaving US yields low. Meanwhile, Brexit hasn't been systemic for risk markets and as volatility declines, risky assets ought to remain supported. Markets would likely need a bigger global economic shock, out of China or the Eurozone, to shake the current environment.

EUR: Staying constructive – Bullish

“Recent concerns about Italy and the wider EMU's banking sector have not changed our bullish view on the EUR,” Morgan Stanley noted.

MS thinks the probability of an Italian bank rescue is high, as EU leaders will want to decrease the chances of PM Renzi losing the October Italy referendum to keep the currency union intact. This also supports Morgan Stanley’s view that the low balance sheets of EMU's financial institutions will mute their eager to invest overseas, resulting in longer term capital outflows not being sizeable enough to outweigh inflows from the EMU's current account surplus, thus benefiting the EUR.

GBP: Eyes on BoE – Bearish

The upcoming BoE interest rates decision on Thursday will be key for the markets. The UK sovereign yield trend is still steep enough for usual monetary policy tools to minimise nominal and real yields to devalue the GBP. Hence, further monetary policy easing hinted by the UK central bank points to more downside potential.

“Our economists are expecting the BoE to cut rates by 25bp at the meeting,” Morgan Stanley projected. Given that the markets are currently pricing 18bp cut, GBP could devalue further. “Our favored way of expressing this bearish GBP view is through long EURGBP position,” Morgan Stanley finished.

Also see: 5 daily UOB technical setups for Forex traders

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