After some consolidation in the dollar near recent lows over the past few quieter FX sessions, the calendar hots up this week with major central bank meetings and data, which will battle with the ongoing stream of tweets and rants coming out of Pennsylvania Avenue. We will no doubt get more volatility across markets as investors endeavour to make sense of competing drivers – from tariffs-on and tariff-off to DOGE to Europe’s coming-of-age and more hopeful Ukrainian peace news.
Wednesday brings a FOMC meeting and rate decision caught in the crosshairs of declining US exceptionalism, shaky stock markets and still relatively elevated price pressures. We have talked about stagflation in the US previously, and any mention of this in the Chair Powell’s press conference would grab the market’s attention. Rate setters are expected to remain patient, which is an inevitable consequence of the huge policy uncertainty introduced by the Trump administration. Will growth projections for 2025 growth, currently at 2.1% in the December SEP, be cut while core PCE inflation is raised? Does this then influence their rate cut profile with money markets currently on the fence between 50 or 75bps of cuts this year? The dollar will look on with bated breath as it clings on precariously to support in the low 103s.
The Bank of Japan and Bank of England will both also sit on their hands, with the former not least supported by the recent yen strength. A full hike is not priced in until the October BoJ meeting, with just half of a quarter point move for the June gathering. Guidance of any kind will see markets adjust and could push USD/JPY down through recent lows at 146.53. Key for the BoE and GBP will be if the Old Lady reinforces market pricing toward a rate cut at its next meeting in May. That date sees the release of the quarterly updated projections and reinforces the careful approach of rate reductions. We will also be on the watch for any speculation about what UK Chancellor Reeves plans to do at the Spring Budget in a few weeks.
Stock markets will again be one of the major gauges of sentiment after the broad-based US S&P 500 dipped into correction territory (off 10% from record highs). In contrast, other equity indices like the Hang Seng in Hong Kong and European markets have remained relatively buoyant. Growth concerns in the US have spurred rotation out of highly valued tech into defensive pockets of the market. Until policy uncertainty subsides, this theme is unlikely to reverse. Of course, gold has shined in this environment, as a hedge also against inflation. Central bank buying and the huge levels of government debt are likely to continue to boost bullion prices.