FX Daily: Big Central Bank Day Amid Geopolitical Volatility – ForexNews.PRO
We anticipate a 25 basis point rate reduction in Switzerland, while the UK, Norway, and Turkey are expected to maintain their current interest rates. However, foreign exchange rates will primarily be influenced by the evolving situation in the Middle East and its potential consequences for oil valuations.
The US dollar is positioned to maintain its strength and potentially increase in value. However, we believe that this trend is unlikely to provide sustained, long-term support for the dollar.
Yesterday’s key US macroeconomic events (FOMC meeting and Treasury International Capital (TIC) data) had minimal impact on foreign exchange markets. As previously mentioned in our Federal Reserve review, the market is discounting dot plot projections due to tariff uncertainties and volatile oil prices. The Fed’s less concern about growth and unemployment, despite projecting two rate cuts in 2025, also plays a role.
April’s TIC data revealed a limited foreign withdrawal from US Treasury holdings (a mere
9 trillion). This suggests that domestic investors were more involved in the Treasury sell-off than a widespread “sell America” movement. De-dollarization remains an ongoing topic, and more TIC data is required for a comprehensive understanding. Nevertheless, the dollar seemingly averted a crisis with yesterday’s figures, and the absence of compelling proof of a foreign exodus from Treasuries may temper the market’s tendency to build further risk premiums into the dollar’s valuation.
Geopolitics continues to exert a powerful short-term influence. Media reports suggest that the US may be contemplating direct action against Iran, perhaps as soon as this weekend. The elevated USD risk premium stemmed from concerns about US-inflicted economic harm. While this has undermined the dollar’s safe-haven appeal, the combination of geopolitical risks and high oil prices are not US-driven risks. Therefore, the dollar is more appealing than energy-dependent safe-haven alternatives like the euro. Upside risks for USD remain.
EUR/USD is expected to decline due to geopolitical risks, and our near-term target is 1.140. Further declines could occur even without additional oil price spikes. However, geopolitical events tend to have temporary effects on FX unless they cause lasting commodity price impacts, similar to the Russia-Ukraine conflict. Therefore, we anticipate renewed interest in buying EUR/USD on any de-escalation signals.
The Eurozone calendar is light aside from speeches by ECB President Christine Lagarde and other Governing Council members. Central bank meetings in Switzerland, Norway, and the UK are scheduled.
The Swiss National Bank is expected to reduce rates by 25bp to 0%, hinting at potential future reductions. Market pricing reflects a 31bp cut and anticipates a further reduction by year-end. While the initial reaction to the CHF might be positive, reinforcing expectations of negative rates will likely constrain its gains.
Norges Bank will likely hold rates steady. The new spike in oil prices means the new projections may not signal a move before September. EUR/NOK is likely to remain capped on a still hawkish tone.
Finally, the Bank of England maintained its rates, aligning with consensus and market expectations. Although multiple members might dissent and vote for a reduction, overall guidance should remain largely unchanged.
