FX Daily: Lots of Noise, Little Trend

After public holidays in many parts of the world, FX markets return to a very busy week of monetary policy meetings and key data. Yesterday the RBA surprised with a 25bp hike – after only pausing for one month.

USD: Lots of noise, little trend: Neutral View

One measure of the trade-weighted dollar, the DXY, has been roughly unchanged over the last month. This is despite First Republic Bank falling into the hands of the Federal Deposit Insurance Corporation (and its subsequent purchase by JPMorgan) and plenty of market-moving data. Instead, the period has been characterised by some independent trends outside of the dollar – such as the strong Euro and weak yen which has seen EUR/JPY soar to the strongest levels since 2008.

Whether a new dollar trend emerges this week will largely depend on a jam-packed calendar of US events, including Thursday's Federal Open Market Committee meeting and Friday's April jobs report. In ING FOMC preview you can find it here; https://think.ing.com/articles/federal-reserve-preview-a-final-hike-as-us-recession-fears-mount/ , they felt that Fed Chair Jerome Powell may not deliver enough to feed dollar bears and that the dollar could end up modestly firmer. Markets will also be taking notice of events in Australia yesterday, where the Reserve Bank of Australia's (RBA's) April pause only endured one month. And there are many serious US bankers keen to go on record saying that the Fed will not be able to cut rates this year – a clear challenge to the consensus view of a weaker dollar and the 50bp of Fed easing currently priced by the market.

EUR: ECB bank lending survey will help set the tone

EUR/USD is consolidating near the 1.10 area and waiting for fresh input from this week's US and Eurozone calendars. Ahead of Thursday's ECB meeting, it seems markets are settling in to expect a 25bp hike. Expectations of such a hike could be cemented with today's 10CET release of the ECB's quarterly Bank Lending Survey. Tighter lending conditions should support the call for the compromise 25bp hike. Should there be a surprisingly little tightening of credit conditions, the Euro could rally on the view that a 50bp hike could be on the table after all. Again, any upside surprises here could help the Euro. Barring any surprises, it looks like EUR/USD will continue to trade at a 1.0950-1.1050 range into tomorrow night's FOMC meeting.

GBP: Sterling will take a back seat this week

It looks like sterling will take a back seat to events in the US and Eurozone this week. The market has settled on pricing a 25bp Bank of England hike to 4.50% on 11 May – with which I agree. The market also prices the Bank Rate close to the 4.90% area by November, a view with which we disagree.

For the time being, however, expect EUR/GBP to trade around the 0.88 area and be buffeted by all the inputs into Thursday's ECB decision. It is also hard to see GBP/USD moving much away from 1.2500 in the short term.

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