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In our FX review this week we talk through the implications of the two major central bank meetings. We also talk through some interesting other developments, such as the surprise 50bps rate hike from Switzerland.

Fed up

First up was the US Fed meeting on Wednesday. Given the bumper inflation print for May, the market was now trying to decide if the team would hike by 50bps or 75bps. It turned out to be the latter, but it took some time for USD to decide how it wanted to take this.

Initially, the USD sold off, with concerns that the Fed might be going too big too soon. Yet as London walked in on Thursday, we saw a renewed USD bid. We think this was put down to various economists increasing their base case for US rates for next year, with some point to 4%+.

Even with other central banks raising rates, the differential between EUR, GBP, AUD etc is going to increase. Take the UK for example. In the past two months, the BoE have raised by 50bps, the Fed by 125bps. It’s clear that the Fed are going to continue to go on the offensive in coming months. So we think that there’s no reason to bet against the USD anytime soon.

On that basis, even though the US dollar index (DXY) is pushing multi decade highs, we think it can still get stronger. We like to be long USD against low yielding currencies, such as EUR and CHF.

Bank of England (BoE) struggle to deliver

On Thursday it was the turn of the BoE. Despite a 25bps raise, providing a fifth consecutive hike, the committee were clearly trying to placate markets. The UK economy isn’t performing well – April GDP shrank by 0.3% in the latest data released early in the week.

We struggle to be GBP bears from a long-term angle. In the short term, we do think it looks oversold, such as with the dip below 1.20 last week. However, we were surprised at the lack of support that was at this level, given the key psychological importance.

Therefore, we’re happy to take on short-term positions to be long, but ultimately want to sell any meaningful rallies in coming months.

Eventful outcomes elsewhere

One of the interesting events outside of the major central bank meetings was the Swiss National Bank raising rates by 0.5%. This was unexpected, and caused USDCHF to dump almost 3% on the day. It’s certainly a statement from the bank, and one that we think could cause other nations to analyze their actions.

However, with rates in Switzerland still negative, we don’t think the CHF can remain strong for any period of time. That’s why our favourite trade right now is long USDCHF, as an interest rate differential play with a good entry thanks to the move last week.

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