On Tuesday, analysts from ING suggested that the US dollar is likely to find support this week, despite the softer Non-Farm Payroll (NFP) data released last week. The analysts noted that the less robust jobs report, coupled with Federal Reserve officials' efforts to quell speculation about a rate hike, has not reversed the dollar's trend.
They highlighted a decline in cross-market volatility following the Federal Open Market Committee (FOMC) and NFP events, with interest rate, equity, and FX volatility all dropping significantly.
The shift away from divergent monetary policy trends is expected to persist into the following week, particularly leading up to the release of the US Consumer Price Index (CPI) for April. ING's Global Head of Markets, Chris Turner, commented on the implications of lower volatility for carry trade strategies, where the US dollar stands to perform well due to having the highest short-term deposit rate among G10 currencies.
The New Zealand dollar and British pound are also predicted to outperform, though the pound may see some volatility due to the upcoming Bank of England meeting.
Conversely, the Japanese yen remains at the other end of the spectrum, with its low-interest rates and low volatility making it the preferred funding currency. Turner also referenced US Treasury Secretary Janet Yellen's stance on FX intervention, which has not supported efforts to stabilize the yen. The analysts anticipate that market forces will test Tokyo's resolve, potentially pushing the USD/JPY pair into the 155/156 range.
Furthermore, a relatively quiet US economic calendar and a potential dovish shift in Europe, with a rate cut expected from the Riksbank, should contribute to maintaining the dollar's strength. ING predicts the US Dollar Index (DXY) could return to the 105.50/75 range in the current environment.
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