It has been a week filled with monetary policy decisions from major central banks, including the FOMC, ECB, and Bank of Japan. As expected, interest rates remained unchanged across the board. The US kept rates steady, the ECB implemented a 25 basis point rate hike, and the Bank of Japan signaled the continuation of its large-scale easing policy. However, there were notable differences in the outlooks of these central banks. The US hinted at two more rate hikes based on the members’ interest rate projections, while the ECB, led by President Lagarde, explicitly mentioned a rate hike in July and revised its core inflation outlook higher. On the other hand, the Bank of Japan reaffirmed its commitment to the Yield Curve Control (YCC) policy.
The forex market has been reacting to the varying degrees of hawkishness or dovishness among these central banks. The most noticeable reaction has been yen selling due to its prolonged ultra-loose monetary policy. The surprising hawkishness of the ECB has resulted in increased buying of the euro. While there was some surprise regarding the number of anticipated rate hikes in the US, the immediate stance remains unchanged, with Federal Reserve Chair Powell indicating a slowdown in the pace of rate hikes during the press conference. Overall, there has been a prevailing pressure on the US dollar against currencies other than the yen.
Next week will bring the monetary policy announcements from the Bank of England, Swiss National Bank, and the Central Bank of Turkey, which will be closely watched. Although extreme, there are expectations of a significant rate hike of 20-40% by the Central Bank of Turkey, while the Bank of England and the Swiss National Bank are expected to implement 25 basis point rate hikes. If these expectations are met, it is likely that the yen will be relatively weaker compared to other currencies.
Today, as we approach the weekend, the economic calendar is relatively light, with the release of the University of Michigan Consumer Sentiment Index preliminary reading for June being the main event. Typically, after a week of yen selling and dollar selling, some adjustments may occur. However, considering the expectations of central bank rate hikes next week as mentioned earlier, there is a possibility of further downward pressure on the yen. It will be interesting to see the extent of these adjustments as the market prepares for the upcoming week.
Based on the ECB’s outcome yesterday, today’s focus is on buying the euro.