The Dollar Index (USDIDX) is gaining for the second consecutive session, adding another 0.15% an hour before the final Fed decision under Jerome Powell's leadership. The US currency is dominating almost the entire forex market today, with resistance seen only from the oil-linked Canadian dollar (USDCAD) and the Norwegian krone (USDNOK), which are currently trading flat.
Market Flees from Risk
The market has shifted to total defense and risk appetite has dropped sharply following new reports regarding the conflict in the Middle East. In an interview for the Axios agency, Donald Trump announced that he would not lift the blockade of the Strait of Hormuz until an agreement is reached that includes Iran's nuclear program. The US President reportedly rejected an Iranian deal proposal and suggested the possibility of resuming hostilities.
The return of Brent crude contracts (OIL: +6.4%) above the psychological level of $110 per barrel is hitting emerging market currencies hardest (e.g., South African rand, USDZAR: +1.8%; Hungarian forint, USDHUF: +1%).
Declines are also affecting G10 currencies. Losses are led by Antipodean currencies (AUDUSD: -0.75%, NZDUSD: -0.85%), ignoring, among other things, the rise in Australian inflation from 3.6% to 4.1%. EURUSD, CHFUSD, and GBPUSD are retreating by approximately 0.25%.
The strong synchronization of oil prices and the dollar confirms the dollar's status as the most important safe haven, while simultaneously pointing to a risk of a correction on the USDIDX in the event of relief in oil prices. Source: xStation5.
Yen Testing the Pain Threshold
Among classic safe havens, the Japanese yen received the biggest blow today (USDJPY: +0.5%). The yen weakened past the psychological barrier of 160 per dollar following the Bank of Japan’s April meeting, at which Governor Kazuo Ueda refrained from providing a clear sign concerning the timing of the central bank’s next interest-rate hike. Although the swap market is pricing in a 66% chance of a hike in June, the lack of hawkish communication from the BoJ has encouraged investors to further sell off the currency.
Japanese policymakers, led by Minister of Finance Satsuki Katayama, remain on high alert, warning of a response to "speculative moves" around the exchange rate. JPMorgan estimates that currency intervention could materialize before reaching the level of 162 per dollar, especially if the government decides to use the ongoing holiday period in Japan.
The widening "divergence" in bond yield spreads between the US and Japan for nearly a year partly justifies the Tokyo government’s concerns regarding the speculative nature of upward pressure on USDJPY. On the other hand, Japan—being close to the conflict, with high exposure to the risk of oil shortages and fragile economic growth—does not fundamentally support the yen, especially given the lack of decisive BoJ communication. Source: XTB Research.
The yen is the only G10 currency to have lost against the dollar this month. Source: XTB Research.
Aleksander Jablonski, XTB Quant Analyst
🔴 Fed Conference: Powell remains as a governor (LIVE)
⬇️US500 Sees Largest Correction Since March
BREAKING: Fed keeps interest rates unchanged 📌 EURUSD extends below 1,1700 📉
🔥US Prepares Strike on Iran? Trump Rejects Compromise. Brent Crude Surges Past $110!
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.
