The focus will now shift to the Bank of Japan and Federal Reserve meetings next week. We expect the Bank of Japan to announce further easing and the Fed to change the April statement to a more balanced risk assessment of the economic outlook.
Our view, is that QQE has been highly effective and that the BoJ has no choice but to double down,with the most potent signal a shift back to balance sheet expansion (and away from negative rates), in sympathy with the ECB in March and consistent with Governor Kuroda’s speech at Columbia University last week.
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Both developments are in line with our strong conviction that USD/JPY will move higher in coming months.
Our UK economists revised their forecast for the Bank of England lift-off date from Q4 2016 to Q2 2017. Even after the revision, our forecast for the path of the policy rate remains steeper than current market pricing. Sterling is trading closer to the top of its recent range.
Given our view that the currency will depreciate further as we approach the referendum date, tactically the recent appreciation represents an opportunity to hedge against Brexit risk.