My subscription
...
Filters
My Subscription All Publications

FX Markets

FX Markets Weekly Wrap

Dollar struggles despite equity sell-off

After another volatile few days across financial markets, the US dollar looks set to end the week lower against most major currencies. Given the renewed falls in “risky” assets, that is arguably somewhat surprising: the dollar generally does well when risk sentiment worsens. The simplest explanation, as we suggested last week, is that currency markets tend to mean revert, especially following large and rapid moves. After its recent rally, the dollar was due a pause. The key question now is how long that pause lasts. ECB Drop-In (24th May 10:00 ET/15:00 BST): Could the ECB deliver a hawkish surprise? Join economists from our Europe and Markets teams for a discussion about what to expect from the Bank’s tightening cycle, including the chances for a bumper hike in July or even an early move at next month’s meeting. Register now.

20 May 2022

DM Markets Chart Book

Markets are creaking but not (yet) breaking

So far, the sell-off across bond and equity markets this year has not triggered major signs of systemic risk. If that were to change, central banks would probably have to step in to prevent a destabilising cycle of panic selling and money market distress from taking hold, even if such as step would to some extent clash with their plans to tighten monetary policy further. This publication takes stock of the various signs of stress across the global financial system. We intend to update the analysis periodically while the current market turmoil continues. In view of the wider interest, we are making this Stress Monitor available to clients of our Global Markets, FX Markets, and Asset Allocation Services.

20 May 2022

FX Markets Weekly Wrap

The dollar rally might be due a pause

Despite a reversal today, the US dollar looks set to appreciate for the sixth week running as “risky” assets remain under pressure. The DXY index has had its largest six-week gain since mid-2016 (while the S&P 500 has had its worst such period since the onset of COVID-19 in early 2020). And, despite Wednesday’s above-expectation US CPI print pointing to strong prices pressures and continued hawkish rhetoric from Fed speakers, government bond yields dropped back sharply this week. In other words, financial markets appear increasingly driven by fear of an economic slowdown.

13 May 2022

Key Forecasts

DM

2022

2023

2024

EM

2022

2023

2024

DXY

107.94

100.26

95.80

USD/CNY

7.00

7.00

7.00

EUR/USD

1.00

1.10

1.15

USD/INR

76.00

77.00

78.00

USD/JPY

140.0

130.0

120.0

USD/RUB

90.00

100.00

110.00

GBP/USD

1.22

1.30

1.35

USD/BRL

5.00

5.30

5.50

USD/CAD

1.24

1.33

1.33

USD/MXN

21.00

20.50

20.50

AUD/USD

0.74

0.72

0.70

USD/ZAR

16.50

17.00

17.00

Sources: Refinitiv, CE; all values are year-end forecasts.


Dollar struggles despite equity sell-off

FX Markets Weekly Wrap

25 May 2022

Our view

We think the rises in global government bond yields and falls in equity prices have a bit further to run. Government bond yields have typically peaked only shortly before the ends of central bank tightening cycles and we expect most major central banks to continue hiking rates over the next 12 months or so. We think the increase in government bond yields, as well as the threat of slowing global economic growth, will keep risky assets, such as equities and corporate bonds, under pressure. We also expect the worsening risk environment as well as particularly aggressive tightening by the Fed to result in a further strengthening of the US dollar. We suspect markets will only start to turn a corner around the middle of next year as tightening cycles draw to a close.

Latest Outlook

FX Markets Outlook

The next stage of the dollar bull market

The combination of aggressive tightening from the Fed and worsening risk appetite has driven the dollar to its strongest level, in aggregate, since the early 2000s. While the greenback looks due a pause, we now expect it extend those gains over the coming quarters as most major central banks struggle to match the Fed’s hawkishness (or, in some cases, ease policy) and economic growth slows more sharply in Europe and Asia than in the US. We think that this will lead to a dollar-positive further tightening of financial conditions as the recovery in global growth and trade slows further, and the risk environment worsens. We forecast EUR/USD to fall to parity; the renminbi to weaken to 7 per dollar, and the yen to fall further even after its precipitous plunge over the past couple of months. While we anticipate the greenback will give back some of its gains in 2023, we think the near-term risks to our forecast are skewed towards an even stronger dollar.

29 April 2022