As a rule, the exchange rate of a currency rises when its issuing central bank tightens monetary policy. But what if competitors are also raising the rates? What factors to consider and how to build an effective strategy? Let’s discuss the topic and make up a trading plan for EURUSD, USDJPY, AUDUSD, and USDSEK.
Monthly G10 currencies fundamental forecast
As a rule, central banks that have already decided on the speed of monetary policy tightening are of less interest to investors than those who are just starting this process. Changes in Forex trends are due to shifts in the regulators’ stance. The markets are closely watching this process. For example, in 2021, the Fed’s transition from a wait-and-see approach to normalization determined the dynamics of the US dollar for many months.
Whoever goes first wins. This chess principle does not always work in Forex. More precisely, as in the board game, it works only at the first stage. The Reserve Bank of New Zealand, the Bank of Canada, and the Bank of England were the first to tighten monetary policy. However, in the middle of spring, the positions of the kiwi, loonie, and pound no longer look as confident as at the beginning of the cycle. However, at their last meetings, the RBNZ and the BoC raised borrowing costs by 50 basis points.
Dynamics of G10 central banks’ rates
Australia and Sweden intended to sit out high inflation. However, as soon as it became clear that this would not work, both countries turned hawkish.
According to the minutes of the last RBA meeting, core inflation exceeding the upper limit of the target range of 2-3% in the first quarter, as well as a potential acceleration in average wages against the backdrop of historically low unemployment, brings the first cash rate increase in a decade closer. CPI data will be published on April 26. Bloomberg analysts expect the figure to rise to 3.2%. The derivatives market expects borrowing costs to increase by 25 basis points in June, with a subsequent increase to 2%.
In Sweden, inflation is at 6.1%, the highest since 1991. It may leave the traditionally dovish Riksbank no choice but to turn hawkish. Most likely, the key meeting will be on April 28. Currently, the regulator does not expect rates to rise until 2024, while the futures market predicts their growth by 1% by November.
The speed of monetary restriction is also important. Investors consider the Fed the most aggressive central bank among the G10. In April, the USD strengthening against competitors can be explained by expectations of a 225-250 basis points increase in the federal funds rate. Although, strong demand for safe-haven assets also helps the greenback.
Speed of monetary tightening
Source: Nordea Markets.
If global risk appetite continues to fall soon, it makes sense to continue buying USDJPY and selling EURUSD. On the contrary, the gradual recovery of US stock indices will become the basis for the formation of AUDUSD longs and USDSEK shorts. Traders should pay attention to the release of Australian inflation data on April 26 and the Riksbank meeting on April 28.
Price chart of EURUSD in real time mode
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