Tomorrow will see central banking’s heavy hitters up to bat in Frankfurt. Janet Yellen of the US Federal Reserve, Mario Draghi of the European Central Bank, Mark Carney of the Bank of England and Haruhiko Kuroda of the Bank of Japan are scheduled to address ‘communication challenges’ at a conference held at the ECB’s headquarters. We think the upshot will be a bullish outlook for the USD, based on policy divergence and yield steepening. A low-yielding G10 and high-beta emerging market currencies look especially exposed.
Central bank guidance is as clear as mud. Economic outlook remains positive: favourable macro conditions with subdued inflation suggest that tightening money won’t happen yet except in the USA, which likely has an increase coming in December. Yellen and her successor Jerome Powell must remain ahead of the inflation curve. Meanwhile, headlines over a struggling US tax plan will likely weigh on stocks and negatively affect sentiment on the dollar.
By Peter Rosenstreich