The dollar was relatively unchanged on the release of yesterdays FOMC statement, but Fed Chair Powell's press conference comments sent it around 1% lower across the board. US rates softened on the press conference, with pricing for the Fed funds rate in December 2023 being cut by 10bp to 4.40%. Lower volatility in the rates space will likely feed into lower FX volatility. The MOVE index, an index of implied volatility across the US Treasury curve has dropped back to levels last seen in March 2022. Assuming no major fireworks from today's ECB/BoE meeting or tomorrow's US jobs report, lower volatility will result in a weaker USD in the day’s ahead.
The US dollar's broad decline post-FOMC yesterday saw the USD/CAD almost reach 1.3265, its lowest level since the middle of last November. The pair drew slightly closer to 1.3260 earlier today but has rebounded back to almost 1.3295. A move above 1.3300 could see 1.3330-50. The Bank of Canada signaled it is on hold and the USD/CAD rate still seems sensitive to the general risk appetite as well as any USD advances.
The European Central Bank announces its policy decision today followed by a press conference by President Christine Lagarde. A 50bp hike is widely expected as is a hawkish message that will support market pricing of a further 75-100bp of tightening into the summer. EUR/USD opens in Europe above 1.10 - powered by last night's benign FOMC meeting and press conference. A sharp narrowing in rate differentials stands to become a bigger driver of EUR/USD this year and should carry it to the 1.15 area in the second quarter. For the shorter term - there is not much resistance now until the 1.12 area.
Today should see the Bank of England hike the Bank Rate 50bp to 4.00%. Some analysts see a pattern of the BoE hiking forcefully and having a hawkish statement but treading more dovishly in the press conference. On balance, we think Governor Bailey will not want to push back against expectations for further hikes to 4.25/4.50% this summer but may push back against the cut starting to be priced for December. Current global conditions are supportive for the risk-sensitive sterling and suggest GBP/USD could make a run at the 1.2450/2500 area this week.
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