The June rate step by the Fed has become much less likely, the Bank of Japan (BoJ) is leaving its monetary policy unchanged and the ECB first has to wait and see what its latest announced measures achieve before taking further action, according to Ulrich Leuchtmann, analyst at Commerzbank, USD short positions should profit most from the three major central banks sitting tight for now.
“The day before yesterday, the Fed missed an opportunity to prepare the market for a possible rate hike in June. And as it normally doesn’t like causing surprises, this has to mean that a rate step in June has become significantly less likely. This conclusion is grist to the mill for those betting on a painfully slow pace of rate hikes that no longer delivers any USD-positive signals.”
“The ‘divergence trade’ – EUR/USD short positions that had been motivated by the prospect of a more restrictive Fed and a more expansionary ECB – has therefore finally been killed off. Even the ECB has refrained recently from measures to weaken the EUR, with its focus shifting more and more to the credit channel. However, as long as this does not jump-start, not only will the inflationary effect of ECB policy die out, but EUR exchange rates will also remain unimpressed. As it has to be assumed that not all divergence trades are closed, the EUR/USD exchange rate consequently has good chances of climbing further, at least in the short term.”
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