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FX Markets Weekly Wrap

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

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

FX Markets Weekly Wrap

The USD (and FOMC) is unlikely to change course

The US dollar looks set to eke out small gains against most currencies this week as US bond yields rose further and equities whipsawed. While the net effect of the FOMC’s policy announcement and today’s US payrolls report on currency markets was negligible, we think an extremely tight US labour market will keep the Fed on track to continue to tighten aggressively, even if Fed Chair Powell effectively ruled out a 75bp hike in June. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

6 May 2022
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FX Markets Weekly Wrap

Dollar surge continues ahead of the FOMC & payrolls

The US dollar rose for a third week in a row, reaching its strongest level since early 2017 as the growing policy divergence between the major Asian central banks and the rest of the world as well as concerns about Europe’s energy supply added fuel to greenback’s rally. While government bond yields and risky assets have held broadly steady ahead of next week’s FOMC policy announcement and US payrolls, sentiment appears fragile and implied volatility remains elevated across equity, bond, and currency markets. With expectations for Fed policy increasingly aggressive – money markets now discount not only a 50bp hike next week, but a decent chance of a 75bp (!) hike in June – there is arguably ample scope for the FOMC’s announcement to take some of the heat out of the dollar rally. However, given that tighter financial conditions and (implicitly) a stronger dollar is precisely what policymakers have aimed to bring about in order to combat inflation, we doubt they will ease off any time soon. In addition, we expect Friday’s US non-farm payrolls report to indicate that the labour market remains extremely tight, although wage growth may be starting to slow.

29 April 2022

FX Markets Weekly Wrap

Dollar rises further and the renminbi (finally) falls

Another week of broad-based appreciation has seen the US dollar edge higher even as US bond yields have stalled. Instead, it is the sell-off in equity markets over the past couple of days which has driven the greenback to a new high. In some sense, the dollar is in a “heads I win, tails you lose” situation: either US yields rise further and widening yield gaps help the dollar, or risk appetite worsens on worries about the economic outlook and that drives dollar strength. This is underpinned by the Fed’s ever more hawkish rhetoric and a perception that rapid rate hikes are on the way even if, as we expect, growth slows down – this week’s comments from Fed Chair Powell and other FOMC members only strengthen that view. We think the combination of an aggressive Fed and fragile risk sentiment will continue to drive the dollar up.

FX Markets Weekly Wrap

Dollar grinds higher in line with US Treasury yields

The US dollar continued to edge higher against most major currencies, with the DXY index (and 10-year US Treasury yields) reaching a new high for the year. The renewed rise in Treasury yields today reversed the dollar’s weakness following a weaker-than-expected US core inflation print, which pointed to price pressures starting to drop off.  At the same time, although a global monetary tightening cycle is now well underway and money markets discount terminal policy rates above neutral in several G10 economies, investors are starting to question how far central banks will need to, or be able to, tighten policy. The scope to push interest rate expectations higher is arguably limited in the likes of New Zealand, Australia, and Canada. Our view remains that the US economy is relatively well-placed to weather aggressive monetary tightening, underpinning further dollar strength. We are sending this Weekly one day earlier than usual because our offices are closed for Good Friday on Friday, 15th April.

14 April 2022

FX Markets Weekly Wrap

Le Pen & sanction risk put euro under more pressure

The US dollar has risen across the board this week as the Fed’s hawkish message on “quantitative tightening”, renewed sanction risks in Europe, and the polling shift in favour of far-right candidate Marine Le Pen ahead of France’s presidential election put pressure on risk sentiment, especially in Europe. The euro is now around its weakest level in two years against the dollar and has lost ground against most other currencies too. The first round of the election is on Sunday; as we set out here, if Le Pen continues to make gains ahead of the second-round run-off on 24th April, we expect that to put further pressure on the euro, and euro-zone financial markets generally.

FX Markets Weekly Wrap

Dollar treads water amid global tightening cycle

Another solid gain in US payrolls did little to boost the dollar today, which seems set to end the week little changed against most major currencies. During the course of this week, central banks in Chile, Czechia, and Colombia continued to tighten policy, while the latest inflation data pushed up investors’ expectations – and, indeed, our own – for the paths of policy rates in the euro-zone and Switzerland. The lack of substantial monetary policy divergence over the next few years may limit the extent to which the dollar will strengthen against other currencies in the short term. But we still think the dollar could edge higher in this broad-based tightening cycle once emphasis shifts from how fast to how far central banks will tighten, given our view that the US is better-placed than most major economies to tighten above its “neutral rate” in this cycle.

1 April 2022
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