Market price action over the past month was dominated by the twin themes of political dysfunction and economic convergence, both of which played into the hands of the dollar. In the case of the former, it was the US debt ceiling that really stole the show, but that’s not to discount the political turbulence in some emerging markets too, with both the South African rand and Turkish lira hitting fresh record lows on local political developments. However, with the debt ceiling deal all but rubber stamped now, it is the second theme that we think will be pertinent for markets in June. In our view, the aggressive repricing of China’s growth outlook, the ECB’s implied rate path, and the reintroduction of rate hike expectations for the Fed is somewhat overstretched. In China, we think the PBoC will need to ease policy at the margin, but that should lead to much slower CNY depreciation than was visible in May. In Europe, we think markets are underappreciating how slow core inflation pressures will retreat. We think the ECB’s next meeting could therefore trigger a more hawkish repricing in eurozone rates. Meanwhile, in the US, markets are discounting the Fed’s preference to pause at the June meeting too heavily, which could lead them to be disappointed in the near-term. All in, this should lead to a marginal retracement in the broad dollar, but will leave most FX pairs well within recent ranges.
You can read our June 2023 FX Forecasts report here:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst