Political risk set to overshadow central bank decisions

As of writing late on Friday afternoon, markets continue to await confirmation that a peace deal between the US and Iran has been agreed. Rumours of such a pact, signaled on Thursday by social media messages from President Trump, have helped contain the DXY index below 100, for now at least. But without any additional concrete progress, further downside for the dollar looks limited to us. The same cannot be said for the pound, following the resignation of another government minister - we continue to think that additional risk premia should be discounted from sterling valuations. Still, this was not the only development to be overshadowed in the week just gone, with rate decisions from the ECB and BoC both failing to have a noticeable impact on FX markets.

Central banks should remain a key theme in the coming week as well. Rate decisions are due from the RBA, BoJ, Riksbank, Fed, SNB, Norges Bank, and BoE. Several of these policy decisions are live, which should introduce an additional source of FX volatility for traders to contend with. Even so, we suspect that political headlines will remain top of mind in the week ahead. Middle East peace talks are likely to remain the dominant theme early on, absent a surprise over the weekend break. Later on, attention should then turn to the UK, where a by-election could well spell the end of Keir Starmer’s time in office, and possibly trigger a second look at the headwinds facing sterling.

You can read the Week Ahead in full here:

Authors:

Nick Rees, Head of Macro Research

Barry van der Laan, Senior FX Market Strategist

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