News & analysis

Two G10 currencies have been front and centre in terms of price action this week, the US dollar and the Japanese yen. The first of these has had a roller coaster ride, though one that ultimately looks set to see the DXY index finish down on the week. While Tuesday’s European PMIs were constructive at the margin for both the euro and sterling, the counterpart US PMIs indicated a surprise economic slowdown. This put a dent in the US exceptionalism narrative that has underpinned recent dollar strength. Nor did markets seem to know what to do with Q1 advance GDP readings. On the one hand, a 1.6% QoQ annualised growth figure for Q1 disappointed consensus expectations. On the other 3.7% core PCE growth suggested that Fed needs to keep rates high for longer. In our view, the release was a head fake, with the details of the report much stronger than headline readings suggest. Nonetheless, it saw the reemergence of US stagflation speculation, which left markets cautious to take the dollar higher. However, the slow march higher for US yields finally saw USDJPY break through 155 on Thursday in advance of the BoJ’s April policy announcement. While this had been flagged as a potential line in the sand for officials, there was ultimately minimal pushback. Indeed, both the BoJ policy statement and subsequent comments from Governor Ueda suggested a remarkable lack of concern over yen weakness, in sharp contrast to other recent communications from Japanese authorities. This dovishness saw USDJPY break above 157 and left traders scratching their heads on Friday, wondering when the threatened FX intervention would eventually come.

Next week is likely set to begin how this week ended, with markets waiting to see what kind of a reaction is forthcoming from Japanese authorities in response to yen weakness. That said, we think there will be plenty of other things set to keep markets entertained as well. Admittedly, eurozone inflation is likely to be less impactful than usual for markets, with almost all ECB members singing off the same hymn sheet and indicating a June rate cut is coming, the release will still hold some relevance for markets. A Norges Bank meeting next week is similarly unlikely to hold any surprises, an outcome that should leave NOK treading water. One set of data points that is likely to be closely scrutinised, however, is Q1 labour market data for New Zealand, which is likely to confirm that the RBNZ will be amongst the last G10 central banks to start cutting rates. From Wednesday onwards though, the dollar should be the centre of attention. A Fed meeting is set to be followed by a jobs report and ISM PMIs, all of which hold two-sided risks for the greenback.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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