The past week brought several surprises from central banks. The biggest surprise was served by the SNB, cutting rates now, which the market didn’t consider at all. In Japan, money costs rose for the first time in 17 years and thus the last central bank left the negative interest rates. For a moment, the Fed weakened the dollar indicating that there are still three interest rate cuts in the game. However, good macro data from the following day contributed to the appreciation of the USD and the upward movement on EUR/USD was completely negated. On the other hand, the Bank of England sent a “dovish” signal contributing to the weakening of the pound. In Norway, monetary policy parameters did not change. The Bank of Turkey decided on an aggressive increase, raising rates by as much as 500 basis points, which translated into a stronger lira.
The dollar is in a trap. One day it loses after the Fed’s decision and Powell’s conference, another day it gains after good macro data (PMI, Conference Board). There is no breakthrough on the eurodollar, although in the short term we are already outside the rising channel and soon the exchange rate will probably retest support at 1.08.
The yen weakened after the BoJ decision, which was due to the fact that the market did not receive a signal that the institution is beginning a cycle of tightening but is only making a move to adjust monetary conditions to the current macro situation. The USD/JPY rate was again within historic records (above 151.00) this week, which creates a risk of possible currency intervention by the central bank or the Ministry of Finance.
The Swiss franc came under downward pressure as a result of the SNB’s rate cut. Both the EUR/CHF and USD/CHF currency pair should at least in the medium term follow the uptrend that has been ongoing since the beginning of the year.
The lira was able to gain after the decision of the Bank of Turkey, but the scale of appreciation is symbolic, if we look at the USD/TRY chart in a wider time horizon. The step taken by the institution should be treated as something positive, as it shows that the bank is to some extent independent. The lira would have a chance for a stronger appreciating move but only if the bank clearly communicated that it is able to raise rates even higher, until inflation equals its target. The declarations of the CBT that price growth will slow down in the second half of the year can be interpreted as further tightening will not take place.
The Bank of England’s meeting also weakened the pound sterling. The bank kept interest rates at a high level of 5.25 percent and the voting result of 8-1 was more dovish than the expected 7-1-1. No one, however, supported the raise. Overall yesterday’s decision brought nothing new. The BoE took another step towards cuts, but it is still unclear whether this will happen faster than previously expected. The next meeting will likely be decisive. Furthermore, in May we will also know new forecasts. If inflation continues to surprise downwards, then sentiments may actually change towards earlier money cost cuts.
The upcoming week promises to be quite calm. Volatility will fade as we get closer to Easter. From the macro data from the US, the Friday report on American spending is worth noting, which includes the Fed’s preferred measure of inflation (deflator PCE core).
Author: Łukasz Zembik, Oanda TMS Brokers.
