The current forces shaping the global foreign exchange (FX) market are predominantly centered around diverging central bank policy outlooks, inflation persistence, labor market dynamics, and risk sentiment. G10 currencies have witnessed significant shifts in pricing amid altered expectations for interest rate adjustments across the Federal Reserve (Fed), European Central Bank (ECB), and Bank of Japan (BoJ), among others.
This article explores the near-term outlook for major G10 currencies, evaluating how macroeconomic data and monetary policy developments are influencing relative valuations.
Key Drivers Moving G10 Currencies
Currency movements—especially in the G10—are increasingly driven by:
– Inflation Trends: Stickier-than-expected core inflation in the U.S. supports the dollar. Meanwhile, disinflation is farther along in the eurozone.
– Central Bank Divergence: Earlier expected rate cuts from the ECB and Fed have been delayed. The BoJ, in contrast, is embarking on tightening.
– Rate Differentials: U.S. Treasury yields remain among the highest in G10, making the dollar more attractive.
– Economic Growth Expectations: Weakening growth in the eurozone and UK contrasts with more resilient U.S. GDP data.
– Risk Sentiment: Equity markets, commodity prices, and investor appetite for risk affect trade-weighted currency indices.
Let’s delve into current trends in individual G10 currencies:
1. US Dollar (USD): Supported by Resilience and Hawkish Pause
Recent U.S. inflation prints have reinforced the Fed’s caution in delivering rate cuts. Despite earlier pricing of 100bps in 2024 rate cuts, markets have recalibrated expectations to just 50bps by year-end.
Key Insights:
– Core PCE inflation remains above 2%, leading the Fed to adopt a “higher-for-longer” stance.
Read more on EUR/USD trading.