Dollar Touches 2-Year High, Downside Risk Persists for Euro
The United States (U.S) dollar touches two year high on the index amidst Federal Reserve hawkish posh. Currencies traders said in separate notes that USD still has room to gain further.
Hawkish expectations on Fed tightening have continued to offer a supportive narrative to the dollar, which has retained good momentum after the Easter break, ING Economics said in a commentary.
Yesterday, FOMC arch-hawk James Bullard signaled openness to a 75 basis points hike, despite acknowledging that this is not his base case.
The yen is once again emerging as the worst-performing currency in the G10, and with USD/JPY now at 128.00, the perceived probability of FX intervention in Japan is set to rise.
ING analysts said no intervention at the 130.00 mark could mean that the line in the sand is set at 140.00.
So far, more and more verbal intervention by Japan’s politicians (this morning, the finance minister warned against the risk of a rapidly depreciating yen) seems to be having less and less impact on the currency.
At the same time, the probability of a rate hike by the Bank of Japan (BoJ) purely to reduce the Fed-BoJ policy gap has been ruled out by BoJ Governor Haruhiko Kuroda.
“We expect USD/JPY to test 130.00 in the coming days”, ING said.
This week’s data calendar does not include market-moving releases, and most of the focus will be on Fed speakers in the last days before the FOMC blackout period starts on 23 April.
Chair Jerome Powell will speak at an IMF conference on Thursday, while we’ll hear from Charles Evans today and Mary Daly and Raphael Bostic tomorrow.
All in all, analysts continue to expect the dollar to find some support – especially against the low-yielders – this week. DXY should find more room to appreciate above 101.00.
Downside risks persist for EU
Last week’s European Central Bank meeting clearly fell short of the market’s hawkish expectations, and forced a re-pricing of tightening bets.
A key takeaway for FX was that the Fed-ECB gap, which is a major determinant of EUR/USD moves, is set to remain wide for longer.
President Christine Lagarde is expected to speak this week but ING analysts said they doubt she will make any significant U-turn on the policy rhetoric.
Along with the underlying unsupportive policy differential, EUR/USD will face other downside risks this week, as the second round of the French elections (24 April) draws nearer.
Latest polls seem to suggest a relatively safe lead for President Emmanuel Macron over rival Marine Le Pen, but appetite for the EUR will remain low into this weekend’s vote.
Incidentally, there is growing concern about developments in Ukraine after missiles hit the city of Lviv, which had been considered a relatively safe area – partly due to its proximity to the Polish border.
A combination of these factors continues to argue against a recovery in the euro, and EUR/USD may test 1.0700 in the coming days, according to ING note. #Dollar Touches 2-Year High, Downside Risk Persists for Euro
