View of the Week-Calm after the storm has ramifications for FX
An escalation in geopolitical tensions between Israel and Iran last week, as well as the re-emergence of the term "rate hike" in the Federal Reserve’s lexicon, re-ignited market volatility for a time, but the subsequent subsidence will have an effect on the dollar.
The VIX – the market's fear gauge – had jumped above 20 for the first time since October, dragging the S&P 500 through its worst daily losing streak since the back end of 2022.
Meanwhile, popular emerging market currencies – namely the Mexican peso – saw a sizeable unwind. In all of this, the chief beneficiary had been the dollar, which held onto its post CPI gains.
However, with the Federal Reserve now in the blackout period, as well as the fact that there is a lack of tier 1 U.S. data, outside U.S Q1 GDP, trading conditions are likely to be quiescent for the week ahead. As already seen at the start of the week, market volatility is set to ease and thus represent a calm after the storm.
For FX, this will raise the bar for further dollar appreciation and, in any case, allow for a reprieve for its major counterparts.
Keep in mind, with concerns over potential Asia FX intervention – from both Japan and South Korea – this should also act as a weight against the greenback.
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