Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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US dollar firms post FOMC, keeping dollar bears adrift.
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar firmed as the FOMC meeting saw the Fed noting rising fears of both rising unemployment and inflation. The greenback and sterling also rose on reports that the Trump administration is set to announce the first post-Liberation Day trade deal between the US and a major country.
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The market read: the firming of the US dollar post-FOMC had little to do with any drama the FOMC produced and likely a bit more to do with risk-on stance in risk assets persisting here and hopes ginned up by the anticipation of a UK-UK trade deal. This keeps USD bears adrift and worrying about a fresh squeeze on positioning. There is plenty of room for consolidation in many of the USD pairs, as noted in the AUDUSD chart below, without challenging the overall secular bearish USD case. For EURUSD, we are challenging the local multi-week lows near 1.1275, with the first “existential” support level below there the former major high from 2024 at 1.1214, although we have a 1.1250 psychological level ahead of that. For me, things don’t get truly existential for the medium term status of this rally until the 1.1050 area I have discussed before.
It should be an interesting finish to trading this week as we have the US-China talks set to begin over the weekend after Xi has had a chance to pal it up with Vlad in Moscow tomorrow for the 80th anniversary to celebrate the Soviet victory in WWII.
FOMC raises concerns on both unemployment and inflation. This was not the slight dovish lean I was looking for, but though the US dollar firmed, forward Fed expectations for this year hardly shifted a single basis point, so for markets, this was a non-event.
Chart: AUDUSD
The latest USD firming is challenging the USD bearish case in the short-term. AUDUSD saw a bearish reversal around key levels yesterday, including the 200-day moving average, with yesterday’s price action both engulfing the prior two days’ trading range and taking the level back below the key former resistance level at 0.6440. This could set up some further consolidation, whether shallow or deep, time will tell.
Up next
Bank of England today. Sterling is got a boost overnight on reports that the White House is set to announce a trade deal later today that will likely be on quite good terms, given the traditional “special relationship” of the two countries and because the UK-US trade relationship is in relative balance. A 25-bp cut is priced for today, but forward guidance is hotly anticipated, as the June meeting is priced near 50/50 for an additional move. I still lean for a dovish surprise. The EURGBP comeback yesterday was short-circuited by the trade deal anticipation, but clearly the 0.8500-0.8450 area looks pivotal for whether EURGBP returns to the lower range or finds support.
Sweden Riksbank today. Many, including myself, thought that Sweden’s Riksbank was done with cutting rates, but the country’s core inflation rate has dropped faster than forecast and growth is at 0% with trade-related uncertainties ex-Europe mounting. This gives the Riksbank the luxury of forecasting at least a drop of the rate to 25 basis points later this year (already priced), but a more dovish rate forecast is possible, which could weigh on SEK after its dramatic repricing versus the Euro in February-March.
Norges Bank Deposit Rate announcement. Norges Bank tripped embarrassingly over its guidance to cut rates in March, which it didn’t do. NOK has been through a bit of trauma on Liberation Day tariff announcements and the plunge in oil prices, which saw EURNOK ripping higher to the huge 12.00+ level, which seems to be the ceiling. The Norges Bank won’t move today and will likely continue to flag easing later this year. I am constructive on NOK upside potential versus EUR and possible versus SEK if Riksbank leans a bit dovish today.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The US dollar has a lot of further rallying to do if it want to neutralize even our relatively short-term trending indicator, but note the significant two-day momentum shift. Signals elsewhere are weakening, suggesting a market that is losing steam in volatility terms.
Table: NEW FX Board Trend Scoreboard for individual pairs.
The JPY bulls are suffering as this latest reversal in all JPY crosses is backing up as the JPY can’t find follow-on momentum. EURNOK has switched into a downtrend – likely needs Norges Bank and bit more support in the oil market for some help. Watching NOKSEK for upside trend potential in coming days as well.
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