EUR

The FX environment is indeed challenging, yet the overall growth outlook seems sturdy across the board. Following Powell's remarks last week, the dollar has gained some support, and with the market generally short, we're witnessing a low volatility squeeze, even in emerging markets where conviction appears to be somewhat stable. My question is how much further we can adjust US rates given the lack of new data and the tendency of other central banks to adopt a more hawkish stance as cutting cycles mature. While I understand the reasons for the correction, I don't feel the urge to aggressively pursue the dollar's ascent.

Despite continued weak volume from the Fed and BOJ, discussions with clients indicate a reluctance to take positions, generally leaning towards emerging markets without overextending, and showing little interest in the G10 currencies. There’s also attention on the Supreme Court's ruling regarding tariff legality this week, especially in the absence of the regular payroll data. Opinions are divided on its potential impact given that tariffs have influenced the dollar this year; it could provide some temporary relief and a boost to US growth, but there are alternative strategies to manage this situation, such as sector focus and considering the deficit with tariff revenue being critical.

Honestly, I'm lacking the motivation to increase conviction levels. While it's clear why the dollar is slightly rallying, I’d rather find a reason to sell than to chase after it. Growth remains strong globally and equity markets are stable. I had hedged against the euro last week but removed my positions in CAD and AUD, hoping this area remains stable, though it doesn't feel promising. I've sold into the rally in USD/ZAR (which turned out better than exiting my long dollar positions in G10) and I’m still short on EUR/SEK.

The narrative surrounding Europe hasn’t changed negatively in recent weeks, yet the currency's price movement has been quite dull. I believed that positions and views on the euro had grown more mixed due to fading momentum, so I was somewhat surprised by its continued underperformance. From our end, there hasn’t been anything particularly remarkable in flows; the most notable transaction was a large dollar sale by institutional investors midweek last week, which suggests ongoing momentum selling. I’m still holding a small long position since we raised our European growth forecasts last week, but it's not significant. Any failure to regain last week's levels would hint at a possible decline towards the early August lows of 1.1400; we need to reclaim above 1.1570/80 to stabilise.

GBP

We, like many others, anticipate a pause from the Bank of England on Thursday (with a 6 basis points priced in), but since it is an MPR meeting, we expect to receive substantial insights into the MPC's perspective. As Allan points out, they will seek clarity on wage responses and the upcoming Budget delivery later this month, meaning a firm signal to the markets is unlikely – guidance will probably remain unchanged. Regarding the voting, Allan predicts a (6-3) outcome, with Ramsden joining Dhingra and Taylor in advocating for easing, the latter expected to vote for a 50 basis points cut. We have been somewhat cautious about holding short positions in sterling due to its stretched condition, yet it’s challenging to foresee any positive news in the upcoming weeks as the rumor mill – whether fact or fiction – is likely to ramp up, as it did over the weekend. I don't have a strong inclination for the BoE to send a decisive signal for the short end, so I'm taking this opportunity to rebuild long positions as we approach the 0.8750/70 support pivot. DHF has joined SHFs in selling pounds on Friday, with the former having sold in 8 of the last 9 sessions, while RM remained relatively quiet.

JPY

There isn't much to add about the JPY to be honest; the net flows in our franchise haven't been particularly compelling compared to the larger movements seen in the options markets (refer to Pat Locke's article from the weekend). We still believe it’s important to continue testing the MoF’s determination, so we prefer holding long positions, but our confidence is somewhat limited due to the numerous conflicting factors in the market. It's somewhat unusual to mention, but we have quite a bit of US economic data coming out this week, including ISM manufacturing today, JOLTS tomorrow, followed by ADP and ISM Services later – the market will be paying close attention after being directionless for a while on this front. Additionally, the Supreme Court tariff case begins on Wednesday. We are maintaining tactical long positions, with the risk point set at 153.20/30 and the next resistance zone at 154.65/80.