FX Daily: Up and down - a big week for policy rates and currencies

There are a plethora of central bank policy rate meetings this week across the developed and emerging market economies. Rates could be raised as much as 500bp in Turkey, cut 50bp in Brazil, raised 25bp in four G10 economies, and left unchanged in the US. Our baseline assumes that the dollar holds onto its strength through the week.

USD: Dollar looks likely to hold gains

It is a big week for policy rate meetings, with six of the G10 central banks in action. Setting the tone for global markets will be Wednesday's FOMC meeting. Here, our team sees a resolutely hawkish Federal Reserve, where despite unchanged rates the Fed, through its statement and dot plots, will hold out the possibility of one further hike to the 5.50-5.75% range later this year. 

Even though we should see 25bp rate hikes across four European central banks through the week - see below - we doubt the dollar has to lose much ground - if any. The prospect of a prolonged period of unchanged rates is depressing US interest rates and cross-market volatility and leaving carry trade strategies very much en vogue. This - plus Brent trading close to $95/bbl - is keeping the likes of USD/JPY bid and few expect any substantial move in Bank of Japan policy this Friday. If there is to be a further move from Japan - it will likely come in late October when new economic forecasts are released.

It is also a big week for policy rate meetings in emerging markets. In EMEA, the highlight will be whether the Central Bank of Turkey delivers another large hike on Thursday (+500bp expected) in a continuing return to policy orthodoxy, while Brazil should cut rates another 50bp in line with recent guidance. Given the strong interest in the carry trade this year, both the Turkish lira and Brazilian real could stay supported despite these diverging rate stories. 

Elsewhere, Asia sees several rate meetings this week, but change is expected in neither China's Loan Prime Rates nor policy rates elsewhere in the region.

DXY remains relatively strong and there does not seem a case for a decisive turn lower this week - unless we are all surprised by the Fed. There is a strong band of resistance in the 105.40/80 area, which may well cap this week. But equally, DXY should continue to find decent demand below 105.00.