The dollar has continued to strengthen ahead of tomorrow’s FOMC meeting, where a 50bp rate hike and the start of quantitative tightening are widely expected to be announced. From an FX perspective, we would still refrain from making a confident call that a top in the dollar has been reached. Even if the Fed-induced strength might appear more limited now that an aggressive tightening cycle has been priced in, an external environment where markets find other key non-US markets unattractive (namely, China due to lockdowns, Europe due to geopolitical risk, other emerging markets due to tightening financial conditions) offers quite a solid floor to the dollar. Yesterday’s muted dollar reaction to some disappointing ISM manufacturing figures was a case in point: the underperformance of European equities compared to the US seemed to be a bigger driver of US-European FX dynamics. The service ISM will be released a few hours before the Fed announcement tomorrow, while the data calendar is quite empty today.
The CAD continues to maintain a soft undertone. Following the big losses in US stocks last week and through April, equity market volatility continues to be a drag on the CAD's performance. We believe the CAD has some intrinsic advantages, such as tighter BoC monetary policy and strong growth, but those advantages are being overwhelmed by external reasons (stock market volatility), which may keep the USD well supported for the time being. We believe that USD gains should be limited above 1.29, which is the top of the range that has been in place for the past ten months.
EUR/USD is currently struggling to stay above the key 1.0500 support as an appreciating dollar, underperforming European equities and fears of a prolonged Russia-Ukraine conflict as well as ever-deteriorating diplomatic relations between Moscow and Brussels all continue to point to weakness in the pair. Markets could refrain from jumping back into bullish EUR bets before the European Central Bank sends a signal that monetary tightening is imminent. Hawkish comments by ECB speakers may continue to prove insufficient for a market thar has already priced in 85bp of tightening by year-end. EUR/USD remains at risk of dipping below 1.0500 given the FOMC meeting. There isn’t much on the eurozone calendar/ECB speaker side this week.
Expect a couple of days of “wait-and-see” in the GBP crosses as investors hold their breath ahead of the Bank of England meeting on Thursday. Going into the meeting, a 25bp rate hike is supported by eight out of nine MPC members. Markets are a little dovish and the pound could moderately weaken after the rate announcement. Such weakness should prove more pronounced against the dollar, which could find some more support from the FOMC meeting.