Beyond The EU Referendum, EUR/USD Towards 1.16 Target - BNPP

The UK’s EU referendum on Thursday (23 June) will be the main focus in the week ahead, but we also highlight other developments within the G10 FX bloc.

After this week’s relatively dovish FOMC meeting, we think the USD looks vulnerable to a further fall and continue to target a rise in EURUSD to 1.16 by the end of June.

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Fed chair Janet Yellen noted that, before hiking rates again, the Federal Reserve needs to be sure that the recent slowdown in job growth does not reflect an overall softening in the economy’s momentum. Janet Yellen will testify on monetary policy to the Senate Banking Panel on Tuesday (21 June) and FOMC member Kaplan speaks on Thursday (23 June), but we see very little scope for FOMC rhetoric to provide new policy signals and direction for the USD at this stage.

Our BNP Paribas positioning indicator signals net long JPY (+33) and CHF (+7) exposure but short EUR positioning (-8). in contrast to new highs on JPY, the EUR is losing ground vs. the USD and EURJPY is down more than 3%, as the market appears to continue to view the currency as likely to suffer in the event of a UK “leave” vote next week and seems keen to build a short position into the vote. Worst hit, though, were the commodity exporters, supporting our view that risk premium has been under-priced for these currencies.We think the EUR may hold up better than many appear to expect in the event of politically driven market stress next week, with the currency protected by a large current account surplus.

On Tuesday, the minutes of the Reserve Bank of Australia’s June meeting are likely to provide more insight regarding the central bank’s easing bias and its concerns about falling inflation. We continue to think that the rates markets are under-pricing the scope for further RBA easing, pricing in only around a 60% probability of a move by August, which is when our economists expect another policy rate cut. We remain positioned via a EURAUD option recommendation for a fall in the AUD. Elsewhere, Canadian April retail sales data will be released on Wednesday (22 June).