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The more difficult path for FX

The Fed minutes last night revealed that “several” Fed members wanted to raise interest rates as early as June. Whether that view still holds in the wake of last week’s employment report is another matter, but the net effect was to give a modest bid to the dollar in the wake of the release. Interestingly, in looking at the factors that would make them “reasonably confident” that inflation would turn higher, a levelling of the exchange rate was one factor (together with further labour market improvement and stabilisation of energy prices). Naturally though, it’s expectations (and actual) diverging policy paths between the US and elsewhere that are driving the dollar higher, so the Fed’s wish list looks just that; wishful thinking, at least in relation to the currency.

The pattern of trading we’ve seen over the past few weeks has been a lot more consolidative overall on the majors. Cable has held within the range carved in the wake of the Fed meeting last month, with the same just about holding true for EURUSD. The Aussie managed to break lower but has since recovered, whilst USDJPY has failed to break above the 120.0 level on a sustained basis. The conditions we were seeing in the first two months of the year were relatively unique, with many central banks easing policy and the Fed seen gearing up for its first easing. This underlines our view that the majors are going to be a lot more choppy going forward and whilst a firmer dollar is still favoured, the going is going to be a lot tougher. For today, the Bank of England meets but event risk here is virtually non-existent.

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