Jeremy Stretch, Head of G10 FX strategy at CIBC, shares his observations on EUR/USD, the probability of FX intervention ahead by US policy makers and further answers if there is a real need for UK and US to start hiking rates.
Key points from the video: EUR trend remains lower Cautious on the USD trade after the first rate hike USD strength: Will the US policy makers intervene again? Need for the Fed and BoE rate hikes
Trend for EUR remains lower, Greece uncertainty remains
Stretch explains that the euro’s climb isn’t a break away from its downside trend, and ECB’s QE will keep the common currency on its downward trajectory. Greece related uncertainty remains in the markets, with the Greek parliament set to vote today. The key risk ahead for the Eurozone creditors is whether the Greeks will implement the reforms. Capital controls on the Greek banks are set to continue this year. All of this only creates a broader uncertainty into the Eurozone.
Sell EUR strength, but cautious on the dollar angle
Stretch remains a seller for any EUR/USD strength. The EUR leg of the weakness ahead remains, but some caution should be adopted for the dollar side. The focus has shifted back to the Fed rate hike scenario, but the rate rise will be gradual. Thus, dollar strength will remain into the first rate hike, but markets will have to shift to a more cautious approach later.
Will there be resurgence in the verbal intervention in FX by policy makers?
Some periodic references might be seen ahead by the Fed, but corporate might continue to voice their uneasiness as the dollar strengthens, according to Stretch. He believes that a greater uncertainty with the same might not be seen. The US growth story has not been impacted to a greater extend by the dollar story when compared to other currencies. Only a marginal impact has been seen in earnings and growth trajectory.
Is there a real need for US and UK to hike rates?
Neither the US nor the UK economy requires an emergency monetary policy action at this juncture. The strength in the Dollar has already led to some tightening in the monetary conditions in the US.
Some normality is required to be seen by these central banks ahead, but rates will move up in a much lower trajectory than anticipated.
UK – End of year rate rise?
The UK policy makers have recently come out of the closet when it comes to UK rates. The rate increase scenario in the UK largely depends on wages and the labour market tightening. There is room for a cautious tightening in policy, but currency implications remain. The case remains for a moderate degree of tightening in the UK.