FX Update: Big week ahead for FX as all G3 central banks meet. FX Update: Big week ahead for FX as all G3 central banks meet. FX Update: Big week ahead for FX as all G3 central banks meet.

FX Update: Big week ahead for FX as all G3 central banks meet.

John Hardy

Head of FX Strategy

Summary:  The week ahead could prove pivotal with all of the G3 central banks set to meet, with the Fed meeting the day after Tuesday’s May US CPI release. The ECB is expected to continue hiking on Thursday, although tightening expectations further forward have moderated on weak economic data. The Bank of Japan next Friday has the greatest potential to surprise, given low expectations for a tweaking of policy.

Today's Saxo Market Call podcast

FX Trading focus:

  • Norway’s hot May CPI numbers shock NOK higher
  • All G3 central banks meeting next week over three consecutive days, with Bank of Japan offering the most surprise potential as little is priced
  • UK data also in focus next Tuesday after April payrolls and claims data were so poor.

Trading and bias notes:

  • NOK: Big rally today suggests EURNOK trend is turning, allowing stance of selling on rallies for potential back toward 11.15 or even lower eventually. NOKSEK looks a buy on dips, awaiting next week’s Swedish CPI on Wednesday.
  • USD: FOMC on Wednesday next week – Fed may yet hike if May CPI next Tuesday is in-line or higher at the core.
  • EUR: least anticipation of drama from the ECB this week, as a 25 basis point hike is seen as a no brainer, but what is guidance after a miserable run of Eurozone economic data of late?
  • JPY: the BoJ meeting has by far the most potential to jolt markets if Governor Ueda and company decide to tweak policy, ironically with the surprise potential a function of the market not expecting anything new.

Norway CPI helping to cement EURNOK reversal.
Norway’s May CPI numbers this morning were far hotter than expected, at +0.5% MoM and 6.7% YoY for the headline numbers versus +0.3%/6.3% expected, respectively. The core numbers were the more important ones and are seen as likely to trigger the most concern from the Norges bank, with core inflation rising 0.7% MoM vs. 0.4% expected and 6.7% YoY, the latter a new cycle high. One contributing factor has to be the weak NOK, which has dropped over 10% this year alone against the euro. EURNOK dropped sharply on the news as the market upped bets on more hikes to come from Norges Bank, with talk now that a 50-basis point hike could be in play at the next meeting on June 22. The bank would also do well to stop the FX purchases/NOK sales intended to offset oil and gas tax revenue, maintaining a surprisingly high level of purchases this month. As noted in the chart below, EURNOK looks to have turned the corner after an incredibly persistent uptrend since last summer.

EURNOK has rolled over more significantly in erasing most of the prior rally wave for the first time this year as the May CPI print today out of Norway came in far hotter than expected, sparking bets for a new acceleration in the Norges Bank’s tightening regime. Hard to believe that a mere 38.2% of the very persistent uptrend since the lows last August near 9.61(!) to the 12.10 top would take the exchange rate all the way back to 11.15.

Source: Saxo Group

FOMC: market underestimating likelihood of a hike? Tuesday CPI will weigh.
Yesterday’s hot jobless claims number of 261k (the first above 250k since November of 2021, assuming it is not revised below that level) moderated FOMC rate hike bets for next Wednesday’s FOMC meeting. The probability today is seen around 25-30% for a 25-bp hike. Next Tuesday’s May CPI figure is a far more important arbiter on whether the Fed hikes again than the weekly claims number. The last four consecutive Core YoY CPI numbers have printed at either 5.5% or 5.6%, slowing the prior decelerating trend, but with a cycle low of 5.3% expected for May. The headline is expected to moderate all the way to 4.1% vs. 4.9% in April as the most favourable YoY comparisons roll into view through June (June of last year saw the worst acceleration in gasoline prices, for example). If the core inflation number surprises on the high side for either the month-on-month or year-on-year readings, the Fed is far more likely to hike than to stand pat. Remember that the March FOMC economic projections are for the unemployment to rise to 4.5% and for the core PCE to have dropped to 3.3%. The April PCE was at 4.7%, essentially unchanged since the December print of 4.6%. Even with in-line CPI, I suspect the Fed hikes, but the more important factor could be the message in the newest projections we get next week, especially the inferred message from the combined “dot plot” forecasts of Fed policy combined with the PCE and other forecasts for this year and next. The USD likely rallies if the FOMC meeting upsets risk sentiment, whatever the reason.

ECB – no significant surprise side?
The ECB meeting next Thursday offers perhaps the least potential for drama, as the market almost universally expects that President Lagarde and company will hike 25 basis points and speak sternly on the need to keep up the inflation fight, while at the same time having to admit that the Eurozone economy is performing poorly. The official Q1 GDP for both Germany and the Eurozone were slightly negative and . A miss on the downside for the preliminary May estimate for Eurozone CPI also makes it easier for the ECB to simply deliver what the market is expecting and provide little fresh guidance. Citi’s measure of Eurozone economic surprises has reached a very low level at -90. Hard to see why the ECB needs to add any drama to its message next Thursday.

Bank of Japan – the most potential to jolt the market.
After Governor Ueda declared that the Bank of Japan would take up to eighteen months to conduct a policy review (beyond the other side of the next wage negotiation rounds next March), expectations for even modest policy tweaks is low. Still, given those low expectations and the trillions of Japanese investor savings that are always sloshing around global markets, any surprise tweak could deliver an outsized response. Recall that the December tweak of the 10-year JGB yield band to +/- 50 basis points from 25 basis points triggered a one-off avalanche in JPY crosses (USDJPY moved almost 700 pips in a single day=. The pressure is arguably on the BoJ to move on policy after the RBA and Bank of Canada have restarted policy tightening at recent meetings and Norges Bank is now eyed possibly hiking 50 basis points. If the Fed hikes next week, this ups the pressure even more. Again, odds may be theoretically low, but higher than the market expects, and the reaction function to any BoJ move here could prove far more intense than anything the ECB or even the FOMC are likely to deliver next week.

UK labor market data on watch next Tuesday
An important test for sterling also lies ahead next week. While Citi’s economic surprise index is a surprisingly positive +70 for the UK, one of the important economic data points that raised eyebrows last month was the labor market report, one that suggested the number of payrolled employees dropped out of bed in April with little warning with a drop of -136k, while the UK Jobless Claims in April ticked up to a post pandemic-disruption high of 47k. If we get another set of weak labor market numbers for May, it would likely temper the potential for the Bank of England to guide hawkish at the June 22 meeting. Presently, the 2Y2Y yield spread between the UK and the US (the difference between the market’s pricing of the 2-year rate, two years into the future) is near multi-year highs at over 70 basis points and at the top of the historical range (matching the spread during the Kwarteng-Truss mini-budget panic). That looks very stretched as the UK is priced to have a 2-year yield at this date in 2025 of 4.14% while the US is priced to have a 2-year yield of 3.43 at that time.

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar performance has gone flat, awaiting catalysts in the form of next week’s FOMC meeting, which could yet bring a hike even as odds of one have dropped to 25%. But the Bank of Japan has the most potential to jolt market volatility next week. Note the huge NOK comeback in momentum terms in recent days. CHF also firmer after SNB’s Jordan warned on inflation yesterday.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Extreme underperformance of SEK crosses faces a possible test next Wednesday on the Swedish CPI release. Some of the recent SEK weakness may be on negative Eurozone economic surprises. Note that EURNOK looks set to flip to a negative trend today, with GBPUSD probably needing next Tuesday’s US CPI and UK labor market data for a confirmation of direction.

Source: Bloomberg and Saxo Group

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