May(be) more dollar positive

The past week ended with the dollar trading under pressure, prompted by month-end flows, USDJPY intervention, and a hawkish tilt across G10 central bank decisions. The last of these, in our view, misreads the likely path for rates across the BoC, BoE, and ECB. But any readjustment lower for rate expectations will likely have to wait a little, either for follow-up commentary from ratesetters, or for a resolution to the ongoing tensions in the Middle East. Both imply delayed dollar recuperation. Still, this promises some dollar upside as May begins, a dynamic we also expect to be supported by a USDJPY retracement. MoF intervention took the pair sharply lower on April 30th, but that is likely to prove temporary, with fundamentals still supportive of a weaker yen.

Indeed, given recent price action, we see the dollar starting May looking a little cheap relative to the backdrop. Oil prices remain elevated, Middle East tensions are yet to be resolved, and MoF intervention and central bank expectations are likely to unwind over the coming month. This, we think, offers a tailwind for the buck in the week ahead, assuming no more US-Iran shaped surprises. Admittedly, the calendar remains busy, with rate decisions from the RBA, Norges Bank, and Riksbank on the docket, plus jobs data in Canada and the US too. But our sense is that the net result will be to the dollar’s benefit.

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Authors:

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

Research Support:

Martina Blastiak Bielinski

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