Markets prepare for apex bank meetings

In early European trade on Tuesday, the US dollar fell against a basket of six other currencies, with traders positioning for a more hawkish stance from the European Central Bank (ECB) than the Federal Reserve ahead of next week’s policy-setting meetings. The dollar index traded marginally lower at 101.070, close to a new 10-day low after falling 0.4% overnight. The US Federal Reserve is widely expected to raise rates by another 25 basis points at next week’s policy-setting meeting, but expectations are growing that the central bank will start cutting interest rates later this year.

Recent economic data has shown a slowing US economy, and a plunging deposit at First Republic Bank has highlighted the fragility of the country’s banking system. On Thursday, the first quarter US GDP data is expected to show that growth has slowed from the previous quarter. Additionally, the PCE price index – the Fed’s preferred inflation gauge – will be announced on Friday. However, it would take a sharp upward surprise from this index to change the current dovish narrative.

ING analysts noted that unless Friday’s US March core PCE inflation is markedly surprising above the consensus 0.3% month-on-month figure, the expectations for one last Fed hike look locked in, and the dollar is unlikely to need to rally too much further. The EUR/USD rose 0.1% to 1.1048, with a hefty 50 basis point hike remaining a live option at next week’s central bank meeting.

The German business morale rose slightly in April, according to the Ifo institute’s business climate index, released on Monday, adding to hopes that Europe’s largest economy has managed to dodge a winter recession. This all points to the ECB European Interest Rate Decision hiking rates next week, with central bank board member Isabel Schnabel stating that a 50 basis point rate hike was not off the table and would depend on data.

GBP/USD fell 0.1% to 1.2473, drifting off a 10-day high hit earlier, with the Bank of England also expected to hike rates next week. Meanwhile, the AUD/USD dropped 0.2% to 0.6681 ahead of Wednesday’s Australian CPI data, and USD/JPY traded flat at 134.22, ahead of new Governor Kazuo Ueda’s first policy meeting in charge of the Bank of Japan.