A calmer week (hopefully) coming up

Heading into this week, a sparse data calendar combined with a lack of central bank speakers had suggested that light price action would be the theme across FX markets. Not so, as it turned out. Monday instead saw a freakout, driven by an unwind in JPY carry trades following the BoJ’s surprise rate hike and concerns over the US economy after Friday’s soft jobs report. Equities tanked across the board, as did the dollar, with talking heads competing to offer increasingly aggressive suggestions for how fast the Fed should ease policy rates. As we noted at the time, this speculation looked silly to us. While there are growing signs that the US economy is slowing, recession is far from imminent. We continue to look for three Fed rate cuts this year. While markets began to align with this view as the week progressed, swap-implied pricing for Fed rate cuts continues to look overly aggressive, suggesting room for the dollar to retrace higher next week. On this point, a US CPI print could help give markets a further nudge. We expect to see core inflation rise marginally to 0.2% MoM, supporting our call for a 25bp September rate cut. Outside the US, rate decisions from the RBNZ and Norges Bank, alongside a raft of UK data, are the key points of interest for FX markets. All told though, barring an escalation in geopolitical risks over the weekend, this looks like a calmer setup after this week’s chaos.

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Authors: 

Nick Rees, FX Market Analyst

María Marcos, FX Market Analyst

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