Frustration is the name of the game in the FX space, as the currency market’s volatility plummeted to a one-year low. The market simply does not move, making it difficult for speculators to anticipate future moves.
But it might just be the calm before the storm. Comes May, and major central banks are in focus again, with three in particular:
- Federal Reserve
- European Central Bank
- Bank of England
Federal Reserve
The Fed led the way for other central banks in the developed markets and embarked on the most aggressive monetary policy tightening cycle in four decades. Many have said that the Fed will hike until something breaks, and in March, the regional banks in the United States were put to the test.
But despite the risk of a hard landing being considerable and rising, the Fed will likely deliver another 25bp rate hike in May. The question is, what will it signal thereafter? Rumors in the market are that the Fed will pause for six months before delivering the first rate cut. Therefore, the 25bp rate hike expected in May might just be a dovish hike.
European Central Bank
Another central bank in developed markets to hike by 25bp in May is the European Central Bank. The difference here is that the ECB will not reach its terminal rate in May; thus, more hikes are expected.
Hence, the EUR/USD is a buy on dips, which is also why the exchange rate was so resilient.
Bank of England
Inflation is in the double-digit territory in the United Kingdom, making it difficult for the Bank of England to put an end to the current tightening cycle. As such, investors expect another 25bp rate hike in May, followed by a pause.
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