Deutsche Bank analysts foresee a considerable change in the forex market as global central banks transition from interest rate hikes to a more neutral stance, as announced on Monday. This shift is predicted to initiate new trends in foreign exchange, with growth differentials and the varied impacts of monetary tightening worldwide becoming key elements.
Analysts predict that the primary trend will involve retracements of trades that have been successful this year, except for the continued weakening of the Chinese Yuan (CNY). They have identified 10 themes that they believe will shape the forex market, including a neutral EUR/USD, buying USD/CNH, and selling GBP/SEK and EUR/NOK among others.
The euro's trading range this year has been the narrowest on record, suggesting a prolonged breakout could be imminent, although the direction remains unclear. The failure of the EUR/USD to rise notably this year is attributed to the relative outperformance of US growth compared to Europe. The divergence in growth between these regions is believed to have peaked, with indicators such as bank credit conditions improving in Europe but continuing to worsen in the US.
Despite pessimism around Europe's external competitiveness, Deutsche Bank analysts believe it is exaggerated. They point to the return of the current account surplus to its highs as one reason. However, they acknowledge that the Federal Reserve (Fed) remains a key catalyst for a potential decrease in the dollar value. While US inflation appears increasingly benign, it is robust growth that continues to support the USD.
In a broader context, Deutsche Bank is closely monitoring the US growth trajectory. They have previously highlighted that a Fed easing cycle following a soft landing would be the most bearish outcome for the dollar. However, despite diminishing inflation concerns, the market remains hesitant due to the resilience of US growth.
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