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According to analysts at Morgan Stanley, broader markets are heading too far into bearish territory on the EUR, as the investment bank expects a decline in the USD looking forward.

Key highlights

Morgan Stanley is looking for a weaker USD in the “coming weeks”.

Economic data surprises coming from the US vs the G10 economies could see the Greenback drive lower.

The People’s Bank of China (PBOC) is also expected to adjust their policy stance in response to the rising trade war, which could further weaken the USD.

Regarding the EUR

Markets are overpricing into the shortside  on European political risks and growth outlooks.

The European Central Bank is unable to ease further, considering bond capacity limits.

A topping pattern in the USD could herald a major EUR leg higher.

The EUR/USD has begun to absorb bearish news, refusing to drop below 1.1510.

Regarding the JPY

Morgan Stanley is anticipating another “leg higher” to 115.

Constrained Japanese yields are expected to keep the USD supported against the Yen.