Currencies Brace for Central Bank Meetings: Another Eventful Week Ahead

FX Daily: Currencies gear up for another big week of central bank meetings

Having negotiated the hawkish set of Fed and ECB meetings last week, FX markets will this week brace for around 10 central bank policy decisions across the developed and emerging market space. Further rate hikes in the likes of the UK, Norway and Switzerland can hold the strong dollar in check, while a rate cut in Hungary should not hurt the forint too much.

 

 

USD: Rest of World hawkish push back keeps dollar in check

Looking at US rates and the exceptionally inverted US yield curve, one might assume that all the factors are in place for the dollar to remain strong. And looking at USD/JPY near 142, that would seem to be the case. Yet, last week's hawkish pushback from the European Central Bank and what should be a series of 25bp rate hikes in the UK, Norway, and Switzerland this week serve as a reminder that the Federal Reserve is not hiking in isolation.

 

On the subject of USD/JPY, the US Treasury late last week released its semi-annual FX report - a report established to monitor whether any trading partner was manipulating currency for trade gain. The report was borne out of a weak dollar environment and was an attempt to dissuade competitors - largely in Asia - from preventing their currencies to rally on the back of strong current account surpluses. Needless to say, the strong dollar last year did not allow any opportunities for trading partners to sell local currencies. Indeed many were buying local currencies to mute the shock of imported energy prices.

 

 

And in our opinion, news that Japan has been removed from the US Treasury's Monitoring List has little bearing on whether the Japanese authorities will intervene to sell USD/JPY. That decision will be taken in Tokyo and probably means a repeat of dollar-selling intervention should USD/JPY get anywhere near 145.

 

While much of the focus will be on overseas rate meetings this week, the US calendar still sees important congressional testimony from Fed Chair Jerome Powell on Wednesday and Thursday. It looks too early for him to divert from the Fed's hawkish narrative and will keep the market biased (71% probability now priced) towards a 25bp Fed hike on 26 July.