Financial markets continue in their glass half full view of the world as tariff deadlines get pushed back again. The dominant theme for this quarter we believe will be resurgent US inflation and a Fed resisting heavy political pressure to cut rates. This can deliver some brief respite to the dollar
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It's another day, another record for the S&P 500 and Nasdaq 100, while the Dow Jones hovers just a few points shy of its own all-time high. Small- and mid-cap stocks are also better bid—though still well below their post-election highs. Remarkably, all this optimism comes despite stronger-than-expected employment data that crushed any near-term hopes of a July Federal Reserve (Fed) rate cut. The odds of such a move dropped from around 27% to just 5% following the data.
Today's FX market focus is squarely on the June US jobs report. Does a consensus +110k release provide cover for Fed Chair Powell to continue resisting pressure to cut rates? Or will a weak number put a July rate cut squarely on the table? We think it's too early to say that we've reached 'peak bearishness' on the dollar – but the jobs data will set the tone
Is the first CNB rate hike closer than we think? Friday's inflation data poses an upside risk but the market remains unfazed. The CNB could easily find itself in a situation where inflation stays above 3% for a longer period, and neither the central bank nor the markets are prepared for it. The discussion could quickly change from whether we will see another CNB rate cut to when we will see the first rate hike
Czech PMI flips into expansion zone. The manufacturing PMI entered expansion territory in June, coming in stronger than market participants had expected. This is a welcome change, as the index had remained below the neutral threshold for three consecutive years. We see potential implications for rate-setters if the rebound gains pace and proves sustainable, as the economy picks up speed
FX Daily: The search for dovish validation continues. Yesterday’s US data was a mixed bag, failing to unequivocally endorse the recent speculation on Fed rate cuts. Today, focus will be on the PCE, personal spending and more Fedspeak. EUR/USD has its sights on 1.20, but the path to get there remains very conditional on US-related factors
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FX Daily: Data holds the key to FOMC balance. We expect the dollar to become more sensitive to data in the near term, as markets seek a catalyst to double down on recent dovish Fed speculation. Employment figures may be subject to closer examination, with the rationale that a softer jobs market can convert a few hawks after mild inflation failed to do so. EUR/USD continues to face upside risks
The dollar's bearish march has continued after the Middle East crisis brought scattered, short-lived support. EUR/USD has broken 1.170 and is setting its sights on 1.20. The recent short-term rate swings have increased the upside risks, but something needs to happen on tariffs, Treasuries or the Fed for a run to 1.20
Iran and Israel have agreed to a ceasefire, and markets had already started pricing out geopolitical risk yesterday as Iran’s retaliatory strikes against the US appeared measured in size. The dollar is facing fresh pressure on the back of plummeting oil prices, and downside risks for USD remain elevated ahead of Fed Chair Powell's testimony later today
The Israel-Iran war is set to dominate currency trading after the US intervened over the weekend by bombing Iran’s main nuclear facilities.
In June's edition of our latest FX views and forecasts, we're focusing on why EUR/USD may not need to rush higher in the near term, how the yen remains an attractive bet in the longer run, and how domestic factors can start to take a more central role in FX now that markets are becoming accustomed to a weak dollar environment
CZK Poised to Gain as CNB Enters Blackout, Eyes on Hungary’s Budget Vote
The main story in FX remains the rapidly evolving Middle East conflict. If oil prices correct further due to perceived limited supply risk, the dollar can follow suit and move lower. However, some USD-supportive trade news may emerge from the G7 summit in Canada. Elsewhere, the Bank of Japan kept rates on hold, with the yen muted on hawkish signals
Israel’s decision to bomb Iran in order to stop its nuclear programme threw a lifeline to the dollar last week, which had been selling off amid a much lower than expected inflation print and worries about the US economy.
Geopolitical risks failed to update over the weekend and will remain central in FX price action. The dollar's rebound has been lacklustre, and while some support is warranted by the current market conditions, there'll still be a tendency to fade the rallies. A busy week for central banks should see cuts in Switzerland & Sweden, and holds in the UK & Norway
It’s been a hectic April as the whirlwind of tariff news after Trump’s 'Liberation Day' announcement consumed markets. As we have reached a period of relative calm, it’s a good time to reflect on the developments of the last month and how they have impacted the USD/CNY, which has come full circle this month
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• We re-add EUR longs after taking profit today on our long EURUSD spot trade as the pair hit our trailed stop. Eurozone investors are structurally short the EUR and a potential reallocation out of US equities could help the currency.
• We think CAD shorts offers good risk-reward given sensitivity to US growth and the recent unwind in short positioning.
• Trade idea: Long EURCAD. Entry 1.5522; Target 1.62; stop-loss 1.52; total allocation USD5mn.
• The People’s Bank of China has set the USDCNY fixing above 7.20 for the first time since September 2023, and the market may interpret this as a green light for USDRMB to rise to 7.5 to offset the tariff impact.
The foreign exchange market continues to remain volatile overnight with the high beta G10 currencies staging strong rebounds after heavy losses since last week. The best performing currencies have been the Australian and New Zealand dollars alongside the Norwegian krone which have all strengthened by 1% or more against the US dollar.
The dollar sank against major peers, dropping against the euro, and the safe haven yen and Swiss franc, as investors grappled with how U.S. President Donald Trump's far-reaching tariffs will impact global trade and economic growth.
JPY: The recent announcement of a higher-than-expected US reciprocal tariff on both China and Japan triggered JPY strength today. Despite the recent softening of US equity prices, President Trump’s decision to implement these higher-than-anticipated tariffs suggests the so-called “Trump Put” is unlikely to provide any immediate support.
The US dollar has continued to trade at weaker levels overnight after yesterday’s sharp sell-off in response to President Trump’s plans for “reciprocal tariffs”. The dollar index declined by 1.7% yesterday on a closing price basis which was the largest daily sell- off since November 2022.
The EM market has been in standby mode with high uncertainties ahead of the US tariff announcement at 16:00 ET on 2 April. The EM market seems to have partially priced in the US tariffs, but there could be more market reactions when the details are released.
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Investors are nervously waiting on the announcement of US President Donald Trump’s tariffs. With reports that deliberations on the tariffs are still ongoing, even with hours left to their unveiling, as well as speculation about the form they will take, investors remain uncertain.
The announcement of the reciprocal tariff plan comes against a backdrop of worsening economic data which has been the key factor behind the change in financial market reaction to tariff news from US dollar supportive to dollar negative.
President Trump’s so-called “Liberation Day” has arrived and an announcement is scheduled for the Rosa Garden at 4pm Washington time when all will be revealed in terms of the tariff actions against the US’s trading partners.
The other main event overnight has been the RBA’s latest policy meeting. The RBA decided to leave their policy rate unchanged at 4.10% as expected after delivering the first rate cut in the easing cycle at the previous meeting in February.
It has been a quieter trading session overnight after the risk-off start to the week. The Nikkei 225 index is unchanged after yesterday’s sharp 4.1% sell-off. Similarly, the major foreign exchange rates have been relatively stable overnight ahead of the release tomorrow of President Trump’s plans for “reciprocal tariffs”.
Quiet start to Tuesday with G10 FX trading in tight ranges against the USD, US equity futures flat while USTs are weaker, led by the back-end. Reports suggest that India could cut its tariffs on US imports to avoid April 2 measures, following Trump's headlines on Monday on a potentially softened and/or targeted approach.
At its last meeting in January, Norges Bank’s Monetary Policy Committee kept the policy rate unchanged at 4.5% but reiterated the guidance that “the policy rate will likely be reduced in March”. Since then, spot activity data remained subdued, but the labour market showed signs of resilience and business expectations turned more positive.
We expect Trump’s reciprocal tariffs to impact Vietnam, India, China, Taiwan and Thailand the most among EM Asian economies. The hit on growth might be stronger for Vietnam, Taiwan and Thailand, given their relatively larger exposure to trade with the US (as measured as a % of GDP).
We are one week out from Japan’s financial year-end. An often-asked question is whether there is any seasonality in USD/JPY running into FY-end. The theory goes that Japanese companies may repatriate foreign earnings to dress up their balance sheets for the FY.
At present, the G10 FX PIX 2.0 signals that the EUR and CHF are overbought. We have temporarily suspended the model’s trading strategy for maintenance but hope to be able to report new FX trading signals soon.
The other main development over the weekend was the formal arrest of Istanbul Mayor Ekrem Imamoglu who has been jailed on corruption charges on Sunday. The case has the potential to keep Imamoglu, who denies the charges, behind bars for years and prevent hm running from running against President Erdogan in the next election.
The US dollar has weakened modestly start the start of this week resulting in the dollar index falling back below the 104.00-level. The main trigger has been Bloomberg report stating that President Trump’s plans for a “Liberation Day” tariff announcement on 2nd April is poised to be more targeted according to aides and allies.
Thursday’s session was dominated by central bank meetings, with monetary policy decisions that were in line with expectations. The status quo prevailed in most cases, notably in Sweden (key rate kept at 2.25%), the UK (4.5%) and South Africa (7.5%).
There was a busy schedule of European central bank policy updates yesterday including the latest meetings from the BoE, Riksbank and SNB. The policy updates have had only a modest impact on the FX market. At yesterday’s MPC meeting (click here), the BoE signalled that they are less confident over continuing quarterly rate cuts reflecting heightened uncertainty over the economic outlook.
The yen is finishing the week on a softer footing with USD/JPY rising back above 149.50 after hitting a low yesterday at 148.18. The pair is currently on course for the second consecutive week of modest gains. The yen has been undermined this week by the BoJ’s cautious policy update (click here) when they expressed more unease over elevated overseas uncertainties which were described as “rising quickly”.
KRW, IDR, AUD and NZD depreciated the most vs. USD in historical US equity bear markets; JPY, CHF, and EUR may outperform this time.
Safe-haven bids briefly returned to the CHF due to localised EM turmoil yesterday, while overall EUR/CHF was still able to hold up near 0.96. That is the highest level since last June going into today’s SNB meeting, while in contrast, USD/CHF has fallen to three-month lows.
At the time of writing, UK rates markets are expecting the BoE to keep the bank rate unchanged at its March policy meeting and to ease a total of c.53bp by the end of 2025. The view is broadly consistent with our own view that foresees two additional BoE rate cuts in the coming months.
The Fed left its dot plot unchanged and revised down its growth forecasts while revising up its inflation forecasts. But Fed Chair Jerome Powell said that he still saw room for rate cuts given that the effect of tariffs on inflation will be transitory. He also said the probability of recession was not high.
The pound has outperformed alongside other European currencies this month benefitting from the significant improvement in investor sentiment towards the region. It has helped to lift cable back up above the 1.3000-level for the first time since last year’s US election.
The US dollar has continued to trade at modestly weaker levels following last night’s FOMC meeting. One of the biggest movers has been USD/JPY which has fallen back towards the 148.00-level after briefly rising back above the 150.00-level yesterday.
At 0.61 (vs 0.77 last week) our Risk Index has retreated, indicating a little less investor risk aversion. The Index remains above its 100-day moving average, suggesting a sustained increase in risk aversion.
“When the path is uncertain you go a little bit slower” – Chair Powell. The expectation is for the Fed to leave their policy rates unchanged at 4.25-4.50%. To us, uncertainty around the macro environment and politics will likely equate to little changes to the Fed’s forward guidance. Powell will likely want to keep all the options open.
• USD firmer as markets trade cautiously into Fed decision.
• CAD slips back from probe through upper 1.42s.
• EUR drifts lower after another failure around 1.0950 yesterday.
• GBP tracks peers, short-term price patterns may be tilting negative.
• JPY drops after BoJ holds policy rate at 0.50%, as expected.
• AUD, NZD lower in line with peers; Aus jobs, NZ GDP data due tonight.
• MXN softer on the day but holds gains back through 20.
The Bank of Canada cut this week, facing potential economic headwinds from trade policy uncertainty. While growth has improved over the last two quarters, the BoC noted that it expected the trade conflict with the US to weigh on economic activity, while also increasing prices and inflation.
Despite a volatile fortnight in global FX markets, USD/Asia has stood out for its relatively stability with most pairs moving within a 0-1.5% range.
We have long stressed that diminished US exceptionalism represents a meaningful risk to our stronger Dollar view, and the path for the Yen in particular. When markets are most concerned about US growth, pushing both yields and equities lower, the Yen tends to outperform even the Dollar.
There is no doubt that Europe’s response to changing US policies has been swifter and more definitive than expected. In isolation, stronger fiscal spending should be a powerful antidote to policy uncertainty and other maladies that have plagued the Euro.
ur US economists recently revised their growth forecasts and are now below consensus for the first time in almost three years. At the same time, our European economists responded to the unprecedented German spending plans by upgrading their Euro area growth forecasts despite the looming tariff threats.
Friday's session was marked by the announcement that an agreement has been reached with the Greens in Germany, notably on the €500bn infrastructure fund, of which €100bn will be dedicated to the energy transition, but also on exemptions to the debt brake.
The pound has outperformed alongside other European currencies this month benefitting from the significant improvement in investor sentiment towards the region. It has helped to lift cable back up towards the 1.3000-level for the first time since last year’s US election. In contrast, the pound has weakened modestly against the euro lifting EUR/GBP back above the 0.8400-level for the second time this year.
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.
Four main risks associated with our scenario
At the same time, the US dollar is being negatively affected, especially since its nominal effective exchange rate suggests the currency is overvalued. The US dollar is penalised by concerns over US growth, with an increased risk of stagflation taking hold in the United States.
In the space of a few weeks, the situation in Europe has changed radically, notably as a result of JD Vance's Munich speech and the rapprochement between the United States and Russia over peace in Ukraine, as well as questionings about European security raised by Trump’s announcements. For European countries, these events have been an ‘electroshock’, and they quickly announced a plan to increase defence spending by up to €800bn.
According to Nikkei' s exclusive report, the GPIF is expected to maintain its current asset weightings in its basic portfolio from FY2025, with each of the four asset classes retaining their 25% allocation. The article did not specify any changes to the allowable deviation ranges from these target weights.
The SEK remains the G10 FX outperformer MTD, although the NOK and EUR have closed the gap to the top this week. Of special note, EUR/SEK has failed to extend the multi-year lows reached a week ago in spite of EUR/USD having rallied past last November’s peak of c.1.0937.
US inflation print failed to provide a sustained improvement in investor sentiment in Asia. Investors potentially view the inflation data as not being weak enough to immediately change the outlook for the Fed. US President Donald Trump’s threats of retaliatory tariffs against the EU’s counter tariffs to the US steel and aluminium tariffs are also weighing on sentiment.
The Canadian dollar was the top performing G10 currency yesterday with the policy announcement and communication update ultimately helping to lift the currency. The 25bp cut was well telegraphed and fully priced so the 10bp intra-day jump in the 2yr swap rate was more down to the communications having a hawkish element.
The 25% steel and aluminium tariffs have hit the UK too today but the UK government is reportedly working hard to receive a carve-out from the tariff action. UK Business and Trade Secretary Jonathan Reynolds held a call with Commerce Secretary Howard Lutnick on Sunday about a possible carve-out and PM Starmer brought up the subject when he met President Trump last month.
The US dollar has advanced by about 0.4% from the lows late in US trading yesterday after tariff escalation fears receded somewhat after President Trump reversed his earlier announcement to double Canada’s steel and aluminium tariff from 25% to 50%.
Positive growth impulse in Europe counters tariff hit to Asia The pick-up in risk aversion at the start of this week amongst market participants has triggered a correction lower for emerging market currencies. The CLP (-1.7% vs. USD), COP (-1.2%), BRL (-1.1%), IDR (-0.9%) and THB (-0.7%) have weakened the most since the end of last week while the Central European currencies of the CZK (+0.3% vs. USD) and HUF (+0.1%) have continued to outperform.
The major FX rates have remained relatively stable at the start of this week in contrast to the deepening sell-off in the equity markets. One of the biggest movers yesterday was the Nasdaq composite index which fell sharply by 4.0% and extended its decline since the high in December to almost 14%.
On a monthly basis the Swiss National Bank (SNB) reports reserves in foreign currency assets (including stocks and bonds).
The sharp move higher in yields outside of US has been an important driver of US dollar weakness at the start of this year. The 10-year JGB yield hit a fresh year to date high overnight of 1.58% and has now risen by around 40 basis points year to date.
The USD declined significantly over the last four weeks with the biggest gains for the SEK and the JPY, while AUD, CAD and NZD lagged behind. EM currencies were on balance stronger as well but with more dispersions.
The last four weeks have delivered more uncertainty and volatility as expected and yet there were still a lot of surprises. Particularly surprising is the retreat of the USD amid rising risk aversion. Is this the end of US exceptionalism and USD supremacy? Perhaps, but uncertainty remains too high to take strong po- sitions. The safest bet in our view remains long JPY.
Finally, for USD/JPY to fall strongly, we believe onshore FX players need to become more bullish on JPY buying, and it is one of the key catalysts for USD/JPY to continue falling further.
A commonly raised point is that Shunto wage increases only apply to union members, and the March preliminary results only reflect wage increases from Rengo-affiliated unions, resulting in the data being non-comprehensive. We believe this observation is half right and half wrong.
The euro’s outlook remains tied to developments on US tariffs and on Ukraine peace talks. EUR/USD took a hit late Friday after the Trump-Zelenskyy incident, but has rebounded since trading resumed on Sunday evening – perhaps on the news that Ukraine remains open to a mineral deal with the US and that the EU is actively trying to bring the US back to the negotiating table with Ukraine.
As markets assess the implications of the Zelenskyy-Trump clash on Friday, the focus today is whether US tariffs on Mexico and Canada will go ahead. The FX market is not pricing in 25% duties as a base case, and still leans in favour of either smaller tariffs or another last minute deal. Downside risks for CAD and MXN are therefore sizeable.
• As we had expected, the EURGBP spike in January—which was sparked by UK-idiosyncratic risks—has reversed, and we expect the pair to edge lower over the year toward 0.82.
While simmering trade tensions have been a key driver of FX markets this year, optimism about a potential ceasefire deal in Ukraine and stronger fiscal support, especially from defense spending, have also raised the prospects of a better outcome for European growth.
While simmering trade tensions have been a key driver of FX markets this year, optimism about a potential ceasefire deal in Ukraine and stronger fiscal support, especially from defense spending, have also raised the prospects of a better outcome for European growth.
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