We expect the USD to remain better supported into the Wednesday FOMC decision and beyond, with tighter policy conditions lifting the USD, particularly against those currencies where monetary policy is poised to lag. A 50bps hike is locked in for Wednesday and hawkish guidance is expected to point to more large hikes down the road, especially following the jump in Q1 Employment Cost Index. An announcement on the start to the Fed’s balance sheet wind down—likely within a few weeks—may add to USD tailwinds. US data releases this morning include ISM/PMI Manufacturing data.
Monthly Forecast For May: 4.2% Click here to learn more
We think odds are tilted towards additional GBP losses this week as the bank will likely deliver a message that clearly contrasts with hawkish expectations in markets. The bank’s new forecasts will likely show an even greater overshooting of inflation, but is in the medium-term where its projections will show an important undershooting given forecasts that incorporate aggressive rate expectations in markets. Markets are convinced of a 25bps this week, with very low odds of a 50bps increase. We agree with this call. It is the markets’ expectation of six to seven 25bps hikes by year-end that needs to be reined in, and we think the BoE may kick-off a period of repricing that weakens the GBP further—towards the mid-1.22s, at least.
