The US Dollar, Pound and Euro all traded within in a very tight range last week amid a dearth of major news.
The key March meeting of the Federal Reserve looms just ahead. Policymakers in the US are almost certain to raise interest rates on Wednesday and will also be releasing an updated ‘dot plot’, which will give us an indication as to the likely pace of additional interest rate hikes this year and next.
We did see some weakness in the Canadian, Australian and New Zealand Dollars last week in reaction to general weakness in risk assets, while the Turkish Lira led losses in emerging market currencies. We expect volatility to return to FX markets this week with a flood of central bank announcements scheduled. In addition to the Federal Reserve’s decision, the Bank of England, the Reserve Board of New Zealand, and the central banks of Russia and Brazil, among others will also release their respective monetary policy decisions.
Major currencies in detail
All eyes are now on Thursday's Bank of England meeting. We think that there is potential for a move up in Sterling as the MPC signals that another increase in rates is coming at the May meeting and, possibly, tries to nudge higher medium term rate expectations as well. Financial markets are currently only pricing in around a 60% chance of a move in May, although a hawkish assessment from the BoE this week would move this number closer to 100%.
Inflation data out on Tuesday, the unemployment rate on Wednesday and news that the UK may have potentially reached an agreement on a transitional Brexit deal will make for an unusually busy week for the Pound.
A near-total absence of significant news last week out of the Eurozone was reflected in the common currency trading in just about the tightest weekly range we’ve seen in recent weeks. European Central Bank President Mario Draghi did speak on Tuesday, continuing to strike a cautious tone and suggest that any increase in interest rates in the Eurozone remains some way off.
This week looks set to be equally quiet, with no major data or policy news expected. The Euro will likely trade off of the major central bank news to be released in the US and the UK.
An inflation report completely in line with expectations left little room for major moves in the US Dollar last week. The firing of US secretary of state Tillerson, widely regarded as a moderating force in the Trump administration, did dampen risk appetite in equity and commodity markets but had little spillover into the US Dollar.
A hike in interest rates is fully priced in by the market for this Wednesday’s Federal Reserve meeting. The focus will therefore be on Fed communications. Specifically, the ‘dot plot’ of future rate path expectations and the Summary of Economic Projections (SEP). We expect to see a clear upward drift in the projections for near term hikes, which could have a very tonic effect on the US Dollar this week.