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Continuing the theme of recent weeks, conflict in the Middle East provided the dominant catalyst for FX price action over the week just gone. As of writing late on Friday, the dollar enters the weekend having chalked up a net gain, with a lack of progress in peace negotiations between the US and Iran pushing up oil prices and weighing on risk sentiment. With all eyes on the talks in Pakistan, other data catalysts were largely overshadowed, with CPI data for Canada, the UK, and Japan having little discernible market impact. Assuming no breakthrough before Monday, we expect this pattern to hold again in the week ahead.
Still, the coming week sees a number of major central banks delivering rate decisions that we suspect markets will find harder to ignore. The BoJ, BoC, Fed, BoE, and ECB are all due to hold policy meetings. All are widely expected to leave rates on hold. But for traders, it is forward guidance that will be key, and here we could see notable dispersion. We think markets have been too aggressive in pricing in rate hikes for the ECB and BoE in particular, and look for pushback from policymakers in the week ahead to weigh on the euro and sterling. If realised, that should help support the dollar on a relative basis, keeping the greenback on the front foot, albeit still very much at the mercy of ongoing peace negotiations.
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Authors:
Nick Rees, Head of Macro Research
Barry van der Laan, Senior FX Market Strategist