The swing of the currencies in the wake of the central banks

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It was in late June when the four heads of the world’s major central banks Jerome Powell (Fed), Christine Lagarde (ECB), Andrew Bailey (Bank of England) e Kazuo Ueda (Bank of Japan) gathered at Sintra in Portugal to discuss the prospects of the economy. And then they all appeared to agree in saying that there was still a lot to do to achieve their respective monetary policy targets. Today the movements of currencies of their countries, are trying to anticipate their moves on rates and the trends are far from aligned.

Dollar down. During the week, the index that monitors the fluctuations of the dollar (Dxy) against a basket of foreign currencies among which the preponderant weight belongs to the euro, sterling and yen, touched the lows of the last 15 months and since the beginning of the year it has filed a decline of 3.3%. The US currency fluctuated for most of the year, strengthening in February after a flurry of alarming inflation data, then tumbled in March and April following the collapse of several US regional banks.

The sudden decline of these days is explained by the publication of US inflation data on Wednesday, which boosted expectations that the Fed could soon end its monetary tightening campaign without plunging the world’s largest economy into recession.

What analysts say. Investment banks immediately sensed the trend and stopped betting on a rise in the dollar in the hope of a soft landing for the US economy. Morgan Stanley, JPMorgan, Goldman Sachsself HSBC extension are among the lenders that either dismissed bullish dollar forecasts or projected further declines, and according to the latest survey of fund managers from Bank of America Sent to clients on Tuesday, just a fifth of investors expect a “hard landing” with a contraction in economic output, while 68% expect continued, albeit modest, growth.

What the futures say. Interest rate futures trading imply a quarter-point hike for next week’s Fed meeting, but bets on a further hike in September have declined with a 14% probability, according to the CME’s FedWatch tool. , up from 22% a week ago.

The euro strengthens, but for how long? On the other hand, the trend of the index that measures the performance of the euro is different (Exy) which generally goes in the opposite direction of the dollar. Today it is to a 12-month high and reflects the most decisive moves and words of Lagarde on the upside. Yet the president of the ECB has not yet been able to give a clear direction to her monetary policy.

Next week will implement a new rise of 25 points, but it is not said that in September it will continue on this path. In fact, monetary analysts evaluate the trend of the euro as a short-term movement which is unlikely to last for long.

The direction of the pound. Instead, the recipe from the Bank of England appears clearer and analysts believe that the pound could outperform as real rates have yet to rise. The British currency scored in July new highs against the dollar on the bet that the cost of money will beat the forecasts to rise up to 5.7% by the end of the year, unless there are strong signals on the inflation front that corroborate the data that emerged today.

The latest survey has indeed seen prices drop surprisingly below 8% for the first time in two years. The pound immediately veered downwards, but more consistent signals are needed to understand whether the road to tightening rates is over or not.

Yen waiting for July 28th. On the Japanese front, in July the yen reached its monthly low at 138 against the dollar, to then begin to recover but always remaining below 140. The question is whether the Bank of Japan will intervene or not. Last year the government had requested a purchase of yen to support the Japanese currency and limit the fluctuations due to speculative movements.

The next meeting of the Central Bank is scheduled for on July 28 and some commentators remain uncertain, because the probability of an intervention on the yield curve.

It is a policy in force since 2016 and provides for the BoJ to intervene to contain yields on 10-year Japanese government bonds (YCC). And second Morgan Stanley, MUF extension And UBS extensionthe probability has increased that the central bank will further ease the YCC cap, after taking it to 0.5% last December.