22 June 2021
The aggressive rally witnessed in the US dollar in the past week took a breather on Monday, with most other currencies recovering ground against the greenback.The market’s view of the US dollar has shifted fairly markedly since Wednesday's FOMC meeting, which delivered a hawkish surprise and brought forward expectations for the timing of US rate hikes and QE tapering. Inflation forecasts were revised higher and the bank’s ‘dot plot’ showed that 13 of the 17 voting members now saw hikes before the end of 2023, versus the 7 that had pencilled in higher rates in March. Investors reacted in a gung-ho fashion, pilling into the dollar at the expense of just about every other currency in the world in the second half of last week.There is an argument to be had, however, that perhaps the move higher in the dollar went slightly too far and was exacerbated by an unwinding of short positions held by investors prior to the meeting. With inflation spiralling higher in April and May, the Fed’s hawkishness was not a major surprise, with most of the market anticipating at least one rate hike to be signalled over the forecast horizon. This may perhaps justify the pullback witnessed in the dollar yesterday, which shed around one percent versus the pound and a little over half a percent against the euro. This week will see a handful of FOMC member speeches, with investors keen to gauge whether the extent to which this hawkish shift is supported among US ratesetters. Messrs Bullard and Kaplan both endorsed the bank’s narrative on Monday, warning over the risks of acting too slowly. New York Fed President John Williams did, however, say that it was too soon to shift policy and that the move higher witnessed in inflation would prove temporary. Regardless, it is clear that a tightening in policy is on the horizon and as long as the market continues to price in an unwinding of asset purchases before the end of the year then the dollar could receive some decent support, even in the face of improving global risk appetite. 
Pound recovers ground ahead of BoE meeting
Sterling has actually held up rather well so far this week, perhaps in anticipation of this Thursday’s Bank of England meeting. The BoE has been one of the more hawkish central banks in the G10 in the past few weeks, with a number of members warning that tighter policy may be needed to rein in soaring inflation. While no macroeconomic projections or Inflation Report will be released this week, investors will still be keeping close tabs on the MPC for any indication that it is edging towards slowing down the pace of purchases under its QE programme in the coming months.Indeed, headlines in the FX market this week may be almost entirely dominated by central bank communications, with a number of European Central Bank members also set to make speeches in the coming days. This includes ECB President Lagarde on Wednesday and members Panetta and Schnabel on Thursday. In the meantime, Wednesday morning’s Euro Area PMI data for June will be closely watched and could wind up being the main driver for the euro this week if they materially surprise consensus.
