EUR/USD to advance nicely to 1.22/1.23 as Fed allows further dollar weakness – ING

The dollar had headed into this FOMC meeting on the soft side and the first reaction to today’s statement is for the dollar to soften a little further. Despite the Fed starting to acknowledge the improvements in the economy, the FX market is more interested in signals as to when monetary accommodation will be withdrawn – and those remain lacking. This presents a window for a further dollar decline, economists at ING brief.

Patient Fed reins in dollar’s advantage

“From the one side, the Fed is prolonging the period of deeply negative real interest rates and encouraging investors to raise FX hedge ratios on holdings of US assets. From the other, this Fed patience is allowing monetary normalization stories to advance elsewhere in the world and narrow the dollar’s advantage.”

“In Norway, Canada and potentially even in the UK central banks are expressing increasing confidence in the recovery and announcing plans to reduce stimulus. NOK, CAD and GBP are the outperformers in the G10 FX space this year and we expect that pattern to continue.”

“While wary of picking up pennies in the carry trade in front of the potential steamroller of a bond market tantrum on Fed tapering, we do think that seven weeks until the June FOMC meeting is a long time to be holding dollars waiting for the sky to fall in. Instead, if cross-market volatility continues to sink and commodities continue to advance, selected high yield and commodity currencies should continue to perform well against the dollar. Here we like the MXN and in Europe the RUB should continue to perform well on a front-loaded CBR tightening cycle.”

“The low-yielders – especially the JPY – are typically more susceptible to higher US rates, but assuming the US rate rise does not get out of hand, even EUR/USD may gently advance to the 1.22/23 area as investors focus on European fiscal stimulus and emerging signs of an encouraging 2H recovery in Europe.”