It has been a quiet start to the week for the major FX rates ahead of a busy schedule of G10 central bank meetings this week including the BoJ and Fed on Wednesday followed closely by the SNB, Riksbank and BoE on Thursday. Ahead of those policy updates the US dollar is continuing to consolidate at weaker levels against other major currencies with the dollar index trading just below the 104.00-level.
The SNB is expected to be the only central bank to adjust rates this week so market participants will be mainly focusing on updated policy communication from the BoJ, Fed, Riksbank and BoE.
We expect the Fed to stick to recent communication that they are not in a rush to lower rates further at the current juncture as they take more time to assess how President Trump’s economic policies are likely to affect the outlook for the US economy. The release on Friday of the latest University of Michigan consumer confidence survey revealed another worrying drop in March. The more forward looking expectations component dropped sharply 9.8 points to 54.2 in March extending its decline from the peak in November to 22.7 points. The current reading for March is lowest since July 2022 and will heighten concerns over a more sustained slowdown in consumer spending this year.
Consumer confidence has been undermined by a sharp rise in measures on inflation expectations and more concern over the health of the labour market at the start of Trump’s second term. The 5-10 year measure of inflation expectation in the UoM survey has jumped up to 3.9% reaching the highest level since the start of 1993. There has also been a sharp rise in the number of respondents who expect unemployment to be higher over the next 12 months. It has resulted in the unemployment index falling to its lowest level since the Global Financial Crisis in 2009.
While we don’t think the Fed will overreact to the recent sharp deterioration in consumer confidence measures, it could encourage the Fed to adopt a more cautious tone over the outlook for the US economy this week potentially weighing on the US dollar. The US rate market has already brought forward the timing of the next Fed rate cut to the June FOMC meeting, and is weighing up whether the Fed will deliver two or three more rate cuts this year.
The US dollar has been undermined as well recently by building investor optimism over the outlook for growth outside of the US especially in Europe. There was more good news at the end of last week after it was reported that German Chancellor-in- waiting Friedrich Merz reached an agreement with the Green party on plans to significantly boost defence and infrastructure spending. He triumphantly told reporters that “Germany is back” after meeting with lawmakers. The agreement with the Greens included earmarking EUR100 billion of the proposed EUR500 billion public infrastructure fund to go to the existing climate and transformation fund. Proposed funding will also be extended to 12 years instead of the panned 10 years. Now that the parties have an agreement, the plans are expected to pass through parliament this week when the Bundestag votes on Tuesday. In the current parliament, the CDU/CSU bloc, SPD and Greens control 520 seats which is 31 more than the 489 seats needed for a supermajority. The euro and Bund yield initially rallied once more in response to the agreement with the Greens lifting EUR/USD and Bund yields to highs of 1.0912 and 2.94% respectively on Friday but they have failed to hold on to those initial gains. The price action highlights that the euro is now better priced to reflect the upcoming shift to much looser fiscal policy in Germany. The euro has already strengthened by almost 5% against the US dollar this month. Similarly, the 10-year German Bund yield has already risen by almost 50bps.
