USD, EUR, JPY, GBP: Central Banks Shift Tone; Whats The Trade? - BofAML

Following this week's meetings for some of the major central banks, Bank of America Merrill Lynch Research summarizes its view on their future policies.

"We expect the Fed to hike faster than markets expect; we expect the ECB to taper QE slower than markets expect; we expect the BoJ to stick to its yield target until inflation is much higher than current (zero) levels, but at some point this year drop its guidance on annual purchases (which should not matter in a yield-targeting framework); and we expect the BoE to be on hold, but with increasing risks of a rate hike if inflation pressures persist," BofAML argues. 

"If our Fed and ECB calls are right, we should see EURUSD somewhat lower by the end of the year. Indeed, we expect EURUSD to end the year at 1.08, assuming that the market will come closer to the Fed’s Dot Plot by then. The end of ECB QE should then support the Euro in 2018, bringing EURUSD to 1.15 in our projections," BofAML adds.

As such, BofAML recommends expressing its long EUR bias through non-USD crosses.

In particular, BofAML prefers long EUR/GBP expecting very difficult Brexit negotiations as long as Theresa May sticks to her hard Brexit line.

BofAML also has a long bias for EUR/JPY, waiting for better levels to re-introduce a trade.

Source: Bank of America Merrill Lynch Rates and Currencies Research