Topic: Weekly FX Report

Central banks are diverging in policy: the Fed left rates unchanged, the Bank of England began easing. Despite this, lower yields driven by weaker growth persist, pushing the 10-year Treasury yield below 4%. Major stock indices declined amid rising recession fears and geopolitical tensions, while the yen strengthened against the dollar.

Global risk aversion has gripped markets as investors sell top tech stocks amid yen outperformance. The Nasdaq and USD/JPY are down 9% and 4.5% from their peaks three weeks ago. Political uncertainty has intensified after President Joe Biden withdrew from the election, making the former President Donald Trump the favorite, yet increasing overall uncertainty.

The dichotomy between politics and monetary policy remains the central theme in FX – the so-called Trump trade versus Fed trade. The dollar has rebounded with safe haven demand amid rising geopolitical and trade tensions, despite weaker macro and Fed factors of late.

US disinflation is in full swing and led to the first back-to-back weekly loss of the US dollar since the end of April. Sterling jumped to its highest in a year, boosted by the UK macro backdrop. Another interesting week beckons – on net, we think it could be a dollar negative macro flow.

The tug of war between politics and policy is keeping FX markets on edge. Sterling was unfazed by Labour’s victory, but BoE cuts are coming. Will Biden drop out of the US election and how will Fed easing bets change with the upcoming US inflation report?

Despite signs of the US economy losing steam, the dollar remains appealing due to political turmoil in Europe, Trump rising in the polls, and FX weakness in Asia. The UK’s Q1 growth was upgraded to 0.7%, leading the G7. Meanwhile, USD/CNY is under pressure as Chinese bond yields hit two-decade lows.