USD, EUR, JPY, GBP and AUD strategy from Morgan Stanley:

USD: The End of a Consolidation. Bullish.

We believe that the USD correction is likely nearing an end. This is less due to strength in US data than it is to the dovish comments from the EUR. That said, we do expect US data to pick up going forwards, and are encouraged by the strength in the housing print this week, which led us to revise our 2Q GDP forecast higher. What's more, given the extent of disappointment with US data recently, we believe the bar for upside surprises is low, which should add to USD strength.

EUR: Approaching a Turning Point. Bearish.

We believe that EUR strength is likely to capitulate in the future. While the ECB may not be concerned about the rise in bond yields, the rise in bond volatility may be a source of concern, given its negative impact on EUR risk assets, and in turn, the positive impact on EUR as short positions put on as hedges are unwound. What's more, the latest data shows that the recovery in the Euro Area may have lost momentum in 2Q, supporting our view that EUR could turn.

JPY: Becoming Less Constructive. Neutral.

We believe USDJPY is likely to head higher as bond volatility comes down somewhat, making long FX positions more attractive for Japanese investors. This is partially a reflection of a broader USD rally as EUR gains fade, and also reflective of a more positive outlook on risk appetite. Note that the latest GDP print was strong, but this was largely due to inventories, and is unlikely to continue.

GBP: Selling EURGBP. Neutral.

We believe that GBP will continue to gain support against the EUR driven by monetary policy differentials. With the USD resuming its uptrend we like to sell GBPUSD on rallies with the path determined by rate expectations. The risk to our view is that data continues to come in strong - higher wages, lower unemployment, higher retail sales. The impact of the new government will still be watched by markets in the run up to the Queen's speech and the new budget.

AUD: RBA Cuts Not Priced. Bearish.

We believe AUD has not yet bottomed for a few reasons. First, we believe the market is underestimating the scope for future RBA easing. We are skeptical of the strength of the consumer-led recovery with declining wage growth and rising unemployment. Second, we believe that deterioration in Chinese property is likely to weigh on AUD, as Australia provides raw materials to China for construction.

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