 We continue to look for gradual USD strength with scope for an acceleration should the data permit  EUR vulnerable on a number of fronts, but its negative yields and dovish ECB are likely to be more prominent for now  Among the “risk on” currencies, from current levels we prefer the NZD over the AUD, CAD or Scandies Last month, we argued that a lack of good reasons to sell the dollar would be sufficient for it to grind higher. Our thinking is unchanged even as it posts new YTD highs (DXY index) and if anything, the risk might be for the move to accelerate. The key will be expectations for the 22 September FOMC in the context of the taper timing debate, but these may be shaped largely by August’s employment report on 3 September. Our forecast of a further grind higher in the USD does not rule out excitement. In addition, recent price action shows the USD is well placed to capitalize on any US data surprise, good or bad. Other currencies do not have this luxury.

For now, the EUR does not enjoy many luxuries at all. Growth is reviving as lockdowns ease, but low underlying inflation pressures and the headwinds of Delta variant uncertainties means this is unlikely to translate into any hawkish drift at the ECB’s September meeting that could hope to match the Fed’s taper debate. EUR-USD has tested beneath support at 1.17 and we expect the move lower to extend.

We suspect the better way to play a retreating EUR is not against the USD but against the NZD, which has been hit hard by a COVID-19 outbreak that looks likely to merely delay rather than derail the tightening. The currency looks inexpensive relative to those rate expectations and can play catch-up (with some carry) against the EUR.

Open a trade idea to sell EUR-NZD @ 1.7116, target 1.6640, stop 1.7350 We also expect the NZD to outpace other “risk on” currencies, such as the AUD, CAD and Scandies, which do not have the upside of a potential reprieve from COVID-19 repricing but do face the headwinds of global growth concerns and a Fed taper.

At the opposite end of the risk spectrum, the threat of SNB intervention is likely to become a bigger part of the CHF narrative, but we still see scope for EUR-CHF to grind lower unless 1.07 has become the “new 1.05” pain threshold for the central bank. USDJPY will remain beholden to the vagaries of 10Y US Treasury yields, which suggests a range environment, although the JPY crosses could still offer excitement. We retain our trade idea to sell AUD-JPY with a target of 78.10.

Finally, the GBP may have given up enough ground against the USD so long as UK data show the economy faring reasonably even as government support schemes are withdrawn. The main risk for the GBP would be a loss of enthusiasm from the speculative community, which has been an ardent buyer over the past couple of months.