FX Outlook: Square One

Research evidence excerpt

FX Outlook: Square One

he Fed

FX markets remain focused squarely on two macro issues:

a resurgence in energy prices and the upcoming FOMC

meeting, amid higher nominal and real interest rates with

Source: J.P. Morgan., Bloomberg Finance L.P.

increased odds of rate hikes (Figure 1Focalisuesformarkets:Higherenergypriceswithgasatnewcyclehighs,risingreal/nominalinterestratesandapersistentrelativedolarundershot). In our view, the fol-

lowing observations are most relevant for the FX outlook:

• The rise in interest rates / central bank pricing has not just

• The rise in energy prices now exceeds April highs in been limited to the US; it has been synchronised and glob-

some cases. While Brent is still off the highs, TTF gas al in nature amid rising energy prices (Figure 2Productpriceshaveincheduptowardspriorhighsforseveralproductsaswel)...

prices are at new local highs which should be viewed as

• ...but two things still stand out in favour of the dollar: bearish for the euro, if it persists. Product prices have USD is still under-shooting relative to rate spreads (4th

inched up in recent weeks as well (Figure 2Productpriceshaveincheduptowardspriorhighsforseveralproductsaswel). chart; Figure 1Focalisuesformarkets:Higherenergypriceswithgasatnewcyclehighs,risingreal/nominalinterestratesandapersistentrelativedolarundershot) and while the Fed terminal has pushed

higher when energy prices are going up, declines in

energy prices didn’t help it move lower in June (3rd

chart; Figure 1Focalisuesformarkets:Higherenergypriceswithgasatnewcyclehighs,risingreal/nominalinterestratesandapersistentrelativedolarundershot), illustrating that Fed’s hawkishness is

about more than just higher energy prices. This is unlike

other central DM banks where pricing has been correlated