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[MARKET ANALYSIS] Dollar is marginally higher but with upside capped ahead of key central bank rate decisions this week

Compressed ranges ahead of a stacked central bank calendar are the standard pattern: with the Fed, BoE and BoJ all deciding within days, plus UK inflation in between, positioning desks typically pare back and spot vol gets sold until the first decision lands.

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[MARKET ANALYSIS] DXY is marginally higher but with upside capped ahead of key central bank rate decisions this week

[MARKET ANALYSIS] Dollar is marginally higher but with upside capped ahead of key central bank rate decisions this week

Goldman Sachs forecasts the Fed to hike rates at its meeting this week versus a prior forecast of no change

RBA's Assistant Governor Hunter says Australia household spending is holding up okay, adds inflation in Australia is still above its target, while Australia's business investment is showing signs of strength

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DXY: +0.1%

  • Eked slight gains amid higher oil prices and the negative risk tone, although the gains are limited as participants look ahead to this week's key central bank rate decisions beginning with the FOMC mid-week, with money market pricing leaning towards a hike. Furthermore, there were some mixed comments from the administration as US President Trump reiterated that the US should have the lowest interest rates in the world, while White House economic advisor Hassett said they will 100% support what the Fed decides on rates.

EUR/USD: -0.1%

  • Marginally softened and lingered beneath the 1.1600 handle, while recent hawkish comments from ECB officials did little to spur the single currency, in which Lagarde stated the current inflation shock is longer-lasting, and ECB's Kocher warned that high oil prices could force the central bank to continue hiking rates.

GBP/USD: Flat

  • Trades little changed as participants await UK inflation data on Wednesday and the BoE rate decision on Thursday, with the latter expected to stand pat, while there was quiet weekend newsflow from the UK, although there were relevant comments from US President Trump that he could settle the UK-Argentina dispute regarding the Falklands and that he would love to see Ireland unified.

USD/JPY: +0.3%

  • Edged higher and returned to above the 154.00 level amid the upside in oil prices and despite a widely anticipated BoJ rate hike scheduled later in the week.

Antipodeans: AUD/USD -0.2% / NZD/USD -0.4%

  • Retreated as risk sentiment was pressured at the start of trade, although it has since mildly improved, while there were also declines seen in metal prices.
Context

The setup here carries an unusual wrinkle in the combination of a Fed priced toward a hike, a BoJ also expected to hike, and a BoE on hold, so the usual play of trading the dollar as a single block breaks down into relative policy paths. USD/JPY rising despite an anticipated BoJ hike fits the well-worn pattern in which fully telegraphed BoJ moves fail to sustain yen strength because the carry differential remains wide; the tell in past episodes has been whether guidance implies follow-through rather than the move itself. The administration commentary is familiar in form, with the White House pressing for lower rates while simultaneously pledging to accept the decision, and markets have historically discounted such rhetoric unless accompanied by personnel action at the Fed. The ECB hawkish remarks failing to lift the euro beneath a round handle is consistent with single-currency inertia when the dollar leg is doing the work. The follow-ons are sequential: FOMC first, then UK CPI and the BoE, then the BoJ, with each decision resetting the pairs left to trade.

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