BofA

USD: We have not been bullish enough We have been out-of-consensus USD bulls this year, but it now turns out we have not been bullish enough. EURUSD is back to parity after 20 years. USDJPY is at 139, the highest level since the East Asian financial crisis in the late-1990s. Cable at 1.18 has reached the lowest level since the early pandemic dip. The USD is by far the stronger G10 performer this year, with the JPY the weakest and EUR and GBP in the middle. The overheating US economy and the hawkish Fed have a lot to do with the strong USD. We have been expecting global inflation to be sticky on the way down, but it is still on the way up. US (and UK) headline and core inflation rates are the highest in G10. The US labor market remains strong and stretched. The Fed is downplaying recession risks and is focusing on inflation. The Fed is also allowing the equity market to correct sharply lower, removing its policy put.

EUR: Back to parity

To a large extent, EURUSD reaching parity has reflected USD strength rather than EUR weakness. However, the EUR has also weakened recently and is so far the worst performer in G10 in July. The ECB is the last G10 central bank to start hiking, with the exception of the BoJ. As Eurozone inflation has strongly surprised to the upside and other central banks have been hiking aggressively, the ECB has fallen behind. While all other central banks are focusing only on fighting inflation, the ECB is also concerned about the periphery. It remains to be seen whether and how the new anti-fragmentation policy tool will address these concerns, to allow the ECB to start a proper tightening cycle, but achieving both goals might prove to be challenging

ING

USD: High conviction on 75bp hike by the Fed

Following a rather tumultuous ECB week, we’ve entered Fed week with markets likely having a more solid conviction call on the magnitude of the rate increase. After having quite briefly flirted with the idea of 100bp, investors have centred their expectations around a 75bp move on Wednesday, which is also where economists’ consensus and our baseline scenario lies. Compared to last week’s ECB meeting, there appears to be more limited scope for a surprise in each direction at the July FOMC and we, therefore, expect market volatility to be impacted less this week.

From an FX perspective, we could see a Fed that largely endorses current market pricing for future rate hikes, having a somewhat contained impact on the dollar in the immediate aftermath of the rate announcement. However, we think the Fed message could put a floor under the dollar into September, as the notion that the Fed is still in the front-loading phase of tightening could prevent markets from offloading their long dollar positions. Incidentally, other major central banks (ECB and Bank of England in particular) appear more exposed to dovish re-pricing risks.

Looking at other FX drivers this week, recession fears should continue to prevent a solid recovery in risk sentiment, which should incidentally give some extra support to safe-havens (including USD) and may keep the path uneven for high-beta commodity currencies. On the data side, the 2Q advance release of US GDP figures (after the Fed meeting) should be rather uninspiring, and our economists expect a 0.4% quarter-on-quarter annualised reading (consensus: 0.5%). That should already be in the price, and we doubt it can significantly derail the Fed’s tightening plans or the market’s pricing given that the Bank’s message already embeds the idea of sacrificing economic activity to a certain degree in order to fight inflation.