Fed heads statements keep dollar in ambiguity – currency strength in snail’s pace

The markets' rate hike expectations are still lingering around dollar as the regional fed heads are manipulating this much awaited monetary policy outcome. William Dudley, the Fed President of New York and John Williams, the Fed head of San Francisco hinted the significance of rate hike in 2015 on Monday, on the contrary Evans of Chicago head still looks at it rigidly, thinks that it should unchanged end of H1-2016. Meanwhile, U.S has posted an upbeat numbers of ADP non-farm employment change at 200K which is a spike from estimates and previous flashes of 192K and 186K respectively. 

The US dollar's strength is forecasted to appreciate by more than 5% in REER terms over the next 12 months even though the Fed delays its lift-off. On this stronger USD outlook, we also project the EUR to remain investors' preferred short. The recent moves in FX crosses have left the EUR REER only 4.5% cheap relative to fair, and we look for EUR REER to depreciate by another 11% in the next 12 months.

On the flip side, the ECB is set to expand its QE program soon, pressured by weaker global growth, a softer inflation outlook, and tighter domestic financial conditions. We forecast EURUSD at 1.03 by year-end and 0.95 in 12 months. We think that EURUSD will resume its downward trend based on our expectation of further monetary easing before year-end.