The FX Trader: Central bank meetings unlikely to provide the spark the market looking for.

The latest

BoJ fails to spark JPY volatility. The Bank of Japan meeting was read as hawkish initially on the monetary policy statement shifts on inflation risks, the raised inflation forecasts (core forecast for 2026 raised to 2.8% from 1.9% and 2027 to 2.3% from 2.0% previously), and a 6-3 vote with three hawkish dissenters wanting a rate hike at Tuesday’s meeting rather than a hold as opposed to the 8-1 vote at the prior meeting. Alas, the overall impact on the yield spread to the US 2-year was nil and Governor Ueda’s very two-way discussion of risks sounded typically dovish, or at least non-hawkish relative to the 65+% odds of a June BoJ rate hike. So USDJPY remains thoroughly stuck in the 158-160 zone for over seven weeks. If the war in Iran drives further jumps in oil prices and USD strength, we’ll likely have a significant test of the 160.00 level that Japan clearly wants to defend.

What to provide next spark outside of oil prices ratcheting higher or plummeting on headline risks from the Middle East? The US and Iran are at a stand-off now and oil prices will continue to ratchet higher as long as traffic through the Hormuz strait is mostly choked off. This will tend to weakly support the US dollar, especially as economic weakness fears intensify. More profound USD support probably requires an ugly meltdown in risk sentiment. On the flipside, the volatility potential for USD downside is considerable if any event clears a path to normalization of energy flows through the Hormuz Strait on a rapid schedule.

Four major central bank meetings on tap? Yawn. I previewed this week’s central bank meetings on Friday (ex-BoJ, I am including these below) and we already had the most important meeting of the week in the form of the BoJ. It’s hard to see significant surprises as monetary policy dynamism is not where it’s at for now. Rather, future policy geared at controlling yields and related policy that controls capital flows, the direction of the war in Iran and US-China geopolitics and the direction of the economy, especially the AI economy, are the issues at the fore.

CHF continues to trade on weak side – EURCHF and USDCHF both bear watching. The chief contributing factors here are the franc’s low policy rate, higher crude oil prices which both has other central banks looking to tighten policy, while it also pushes gold prices lower as higher energy costs will limit official purchases of gold and could even see some gold selling to finance. I still can’t help but believe that, at the margin, capital flows into Switzerland will take a hit from the disruptions of the war in Iran. I noted the technical weakness in CHF in Friday’s report and we are seeing additional weakness now, with key levels coming into view in EURCHF: the well-defined range high of 0.9267 and the 200-day moving average near the same level are nearby. In USDCHF, we’re simply mid-range, but a rally up to the 0.8000+ area could have huge implications for a significant rally higher – stay tuned. Elsewhere, note that CHF is even underperforming a weak JPY in CHFJPY, where the recent latest all time high above 204.00 was rejected.

(The four previews below are recycled from Friday’s The FX Trader report)

Bank of Canada (Wednesday): Little drama expected here, with Bank of Canada not seen moving off its 2.25% policy rate until possibly September or October – watching for wording around any urgency on inflation, but Canada is quite well insulated from the price and especially supply-shocks of other economies from crisis of global supplies.

FOMC (Wednesday): No expectations of drama. This should be, and most likely will be Powell’s last meeting as Fed Chair, with the “most likely” needed in that sentence because of the outside risk that Kevin Warsh is not approved in time for the June FOMC meeting. Powell’s term as Fed Chair ends May 15. The forward expectations for Fed rates are entirely flat through the end of this year and we are awaiting the transition to a new era at the Fed under Chair Warsh and how he will coordinate policy with Treasury Secretary Bessent and vice versa. Geopolitics, risk sentiment and incoming US data the week after will likely weigh more heavily than this meeting.

ECB (Thursday): ECB members generally guiding for rate tightening as long as energy prices threaten higher inflation – market will be looking for level of urgency as well as offsetting language around the concerns for the growth outlook that suggest a reluctant hike cycle. With a June ECB hike about 80% priced and two hikes more than fully priced through the September meeting, the hawkish bar feels a bit high (ability to surprise hawish).

Bank of England: Ditto on the ECB observations, although with no pressure on sterling, the BoE ought to keep its urgency low - two fully 25-bp hikes are priced for the three Jun-Sep BoE meetings – that’s the baseline. It’s a fractious MPC and we may see hawkish dissents wanting an immediate hike.

Chart focus: EURCHF
EURCHF is approaching the key range resistance that is very well defined above 0.9250, while the 200-day moving average has descended into this area as well. EURCHF hasn’t traded for an extended period above its 200-day moving average in two years. CHF notably failed to act as a safe haven after the outbreak of war in Iran beyond the initial several days and it’s remarkable to see EUR outperforming the franc when the growth outlook for Europe dims with every nudge higher in oil prices.