USD: Conditions for a data-led correction are ripe - ING

Research Team at ING, suggests that a stagflationary US labour market report (ie, softer activity, rising inflationary pressures) is unlikely to spur much global risk-on sentiment in the near-term.

Key Quotes

“Given that it tentatively corroborates (i) a slowdown in US activity and (ii) a Fed that might potentially be behind the curve. Indeed, this has been the initial reaction in FX markets, with the risk- and rate-sensitive NZD and AUD taking the biggest hit against the dollar. With much of the necessary USD correction (from a financial conditions perspective) having now occurred, we think the conditions for a data-led USD correction are ripe.

So long as inflationary pressures continue to firm, signs of more resilient 2Q US activity is now the missing piece for the USD to retrace some of its recent (and slightly excessive) losses. In the near-term, risk currencies are likely to continue trading softer against the dollar in a fragile risk backdrop; our preference is to sell NZD and CAD against the USD, with both currencies having overshot fundamentals at current levels.”