Weekly: FX – Easing yields improve sentiment on currency markets

by: Georgette Boele , Roy Teo

The EUR/USD continued its decline last week. Better-than-expected US data supported the dollar especially versus the majors. Comments from Fed officials to cool interest rate expectations also underpinned investor sentiment. The rally in US yields lost momentum and this helped EM currencies. USD/CHF and USD/JPY found upward momentum again as investors were more open to the idea of carry trades. In addition, the euro has been hurt by interest rate differentials as markets scaled back their expectations of rising eurozone short-term interest rates more significantly than seen on the other side of the Atlantic. This follows a choreographed communication campaign by ECB officials (see above). EUR/USD has dropped from above 1.34 before the FOMC decision in the week before last to the low 1.30s last week to hit our end Q2 forecast. Going forward, we expect the USD to start its uptrend versus the EUR driven by an improvement in US economic data. Next week crucial US data will be released (such as the labour market report) which will set the tone for the coming weeks.

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