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Wholesale Banking

G10 FX Talking: Another month of a strong dollar

Strong US jobs data and a high January CPI reading have put paid to any ideas of early Fed rate cuts. However, we are backing the disinflation trends this year and continue to believe that central banks on both sides of the Atlantic will be in a position to start cutting rates this summer. We maintain our call for a benign dollar decline starting next quarter

EUR/USD: The bumpy road to 2% inflation

  • Nobody said the disinflation path to 2% was going to be an easy one. That is certainly the case in the US, where stronger jobs data and now higher January CPI figures have created a large speed bump. The January PCE data on 29 February is now the next big focus. Expect to hear more from the Federal Reserve about the ‘bumpy’ path to 2% inflation – but we still think this the true direction of travel.
  • The back up in US rates has naturally lifted the dollar. This may not have too much further to run in that it will be hard to see the market pricing less than 75bp of Fed cuts this year.
  • EUR/USD downside should be relatively limited from here if the above is true. And we think the ECB only starts cutting in June.


USD/JPY: Unstable in this 150/152 area

  • Strong US growth, high US inflation and higher 10-year Treasury yields have conspired to push USD/JPY above 150. The customary verbal warnings from Tokyo have emerged at these levels, but the recent fourth quarter Japanese GDP data suggest local policy makers may not be quite as concerned about yen weakness as usual. Exports were one of the few sources of Japanese growth last quarter.
  • It seems now that April will be too early to expect a significant change in the Bank of Japan’s policy. We still look for a rate hike in June.
  • Our call for a lower USD/JPY increasingly hinges on the US slowdown story. If that does not materialise after all and USD/JPY starts trading above 152, the risk is that we see 160.

Read our full FX Talking article here.