Global Macro Strategy Mid-Year Outlook: Slippery When Oiled

Research evidence excerpt

Global Macro Strategy Mid-Year Outlook: Slippery When Oiled

Global Insight

Kanishk JainMCurrency & Foreign Exchange Strategist

We forecast a further but finite decline in the DXY to 95 amid robust risk Kanishk.Jain@morganstanley.com +91 22 6995-2711

appetite, additional risk premium, and rate compression before rebounding Nimish M Prabhune

Strategist

into 2027 back to its long-run fair value around 100. EUR/USD rises to 1.23, Nimish.Prabhune@morganstanley.com +91 22 6996-1862

but EUR lags on crosses and finds itself increasingly a funder in 2027 amid

ECB cuts back to 2% and additional political risk premium ahead of French

elections. GBP/USD reluctantly rises amid a weaker USD, but GBP lags its

European peers as GBP faces greater carry "competition" and investors

debate fiscal and political risk premium. SEK and NOK both see gains as risk-

sensitive currencies, with SEK catching up to NOK's YTD outperformance,

pushing NOK/SEK back below parity. EUR/CHF grinds lower as investors

underestimate the SNB's tolerance for a stronger franc. AUD and NZD both

see gains to 0.75 and 0.62 as cyclical expressions of risk appetite, while CAD

lags those gains and hovers around 1.35-1.36. USD/JPY remains rangebound

between 156-160 as carry demand bolsters the pair, but concerns over

intervention limit gains.

Inflation-Linked Bonds

In the US, we expect 5y and 10y breakevens to remain elevated at 2.60%

and 2.40%, respectively, by the end of 2026, reflecting high energy prices

and some energy shock passthrough to core. As energy prices settle lower

and inflation stabilizes, we expect 5y and 10y breakevens to fall to 2.35% and

2.25%, respectively, by mid-2027. We see 10y real yields at 1.85% by 4Q26,

rising to 1.95% by mid-2027. In Japan, we see limited upside for BEI well