News & Analysis

This week has been one to forget for our near-term forecasts. The combination of a confident Powell and downwards revisions to January’s NFP print saw the DXY index shift lower by close to a percent. While these outcomes weren’t necessarily a surprise to us, the market response was, primarily because we thought guidance from the ECB and the BoC would also follow Powell’s, laying the grounds for earlier policy easing than markets expected. Granted, ECB speakers did start to reflect this by the end of the week, with both doves and hawks coming out to keep the prospect of an April cut alive, it was too little too late for our drowning dollar call as most long positions had already been flushed out of the market.

In light of this week’s events, the natural question is if we should change our bullish dollar call as the market narrative returns to a soft landing outcome and further yield compression. While our medium-term view will depend on how markets trade through the remainder of the next month, with key inflation data due out of the eurozone and the US alongside another round of PMIs before we fully throw in the towel, our initial inclination is to retain our bullish USD view. This is primarily because higher for longer stances from the BoC and ECB should merely delay the pain for their respective currencies, which account for a significant percentage of the DXY basket. Nevertheless, we have succumbed to the prospect that our near-term views on the dollar are likely too optimistic, that is unless next week’s US inflation data strikes a blow to the “everything is great” view markets are now taking due to more likely Fed easing. Next week will also see notable data releases from Brazil, the UK, China and Poland, all of which pose notable questions for their respective currencies. As such, we’ve opened up the Week Ahead to the trading floor once again, answering some of the most burning questions with next week’s events in mind.

You can read the Week Ahead in full here:

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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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