US Dollar Volatility Continues

Volatility returned to currency markets last week with the US Dollar strengthening against most of its major peers. EURUSD and GBPUSD finally broke out of their recent ranges as the Federal Reserve signaled more than 2 rate hikes in 2023 – a more hawkish stance than previously as March’s forecasts had signaled no rate hikes until the end of 2024. This led investors to reduce their USD short positions, as well as capital inflow to USD on the assumption of higher yields in the medium term.

This week could see further volatility with the dollar picking up where it left off as several Federal Reserve members are speaking and key inflation data will test investors’ appetite for the greenback. The Bank of England meets Thursday and the ECB’s Lagarde speaks today, with key data releases across both the UK and Eurozone also due. Investors will be seeking hints on whether the BOE and ECB are also likely to adjust monetary policy sooner than expected, with the potential for the USD to strengthen further if both central banks fail to impress markets.

UK

Sterling has started this week where it left off Friday - on the back foot. The ongoing strength of the USD continues to weigh on GBP and with the US Fed taking a hawkish view, all eyes now turn to the Bank of England this Thursday. Investors will be looking to see if the BOE expresses any concerns over the recent rise in inflation and more importantly any signals that interest rate hikes could be on the horizon. This month the BOE is expected to leave policy measures unchanged so barring any big surprises markets will concentrate on Andrew Bailey’s comments about future policy decisions.

Euro

Monday sees ECB President Christine Lagarde speaking, with investors closely observing every word for hints on future ECB monetary policy actions. Given the change in stance from the US Fed, investors will need to judge if the Eurozone can keep pace with the US recovery and whether Euro yields will increase in line with USD. Tuesday will see preliminary data on consumer confidence before some key inflation data is released throughout the week, with a European Council meeting Thursday.

US

After significant moves last week the USD could be in line for further strength and consolidation of those gains against its major peers. Three Fed members speak Monday before Chairman Jerome Powell testifies to Congress on Tuesday. Friday will bring one of the Fed’s key inflation data points, whilst throughout the week a number of regional Fed members will be discussing the economic recovery and monetary policy. Throughout the week we will get GDP, durable goods orders, and further PMI data that if above consensus could see further USD strengthening. The greenback also benefitted from its relative safe-haven status as global equity markets sold off last week, a trend that has continued in Asian trading this morning.

Scandi

The lack of macro-data from Sweden last week proved to be disastrous for the Swedish krona. Technical traders did not stand a chance as beta currencies were sold on the back of the Federal Reserve’s surprise announcement. EURSEK moved back into the range it has been trading within for the past 4 months and all gains for June were wiped out in the space of 3 days. The reason being this week is the week of Midsummer, seasonal charting suggests that the Swedish krona has had its chance to shine and may therefore be under pressure for a few weeks. This week the Unemployment figure is out on Tuesday and the PPI on Thursday.

The Norwegian krone suffered a similar fate as its big brother did and is now trading at levels last seen in February of this year against most G10 currencies. In other words, but for the gains in January, all of this year’s Nokkie advance has practically been wiped out. The next set of important macro data from Norway will be released at the beginning of July.