*Yield differentials continue to turn gradually against the USD amid ongoing growth concerns. However, trade-related safe-haven demand and relatively high absolute yields mean the USD may be range-bound.
*The CNY is likely to remain stable ahead of the G20 meeting in lateJune, with subsequent moves likely linked to how trade tensions evolve. The INR is likely to consolidate the recent post-election gains.
*We remain bullish on the GBP medium term despite the near-term Brexit uncertainty. The EUR downtrend appears tired amid a lack of drivers.
USD-Range trading expected
The escalation of global trade tensions has clouded the outlook for both the global economy and the USD. Positive US yields remain attractive in the renewed zeroor negative-rate environment in other Developed Markets (DM), but relative rate differentials are likely to continue to gradually narrow as relative growth and inflation expectations reduce. Future trade talks remain key, both from a risk appetite perspective and given the potential for implicit or explicit currency agreements designed to limit USD strength. The USD (DXY) index hit a marginal new two-year high at 98.37, and resistance up to 100.15 is likely to prove difficult to break. We expect the March 2019 low at 95.74 to be key support as the USD trades sideways, with break of either extreme being an indicator of the mediumterm trend.
IMPLICATIONS FOR INVESTORS
We believe the USD uptrend is fading, but a reversal may not begin while trade tensions escalate. The EUR is likely to find support near current levels and consolidate against the USD Despite near-term risks, we remain bullish on the GBP based on our view of an eventual avoidance of a hard-Brexit.