Stark divergence between Fed and European central banks’ narratives points to Dollar downside risks – ING

Risk sentiment recovered yesterday as markets appeared calmer about the health of European lenders which had generated a sell-off on Friday. Monetary policy still seems to be heading in two different directions in Europe and the US, leaving the Dollar vulnerable.

Fed rate expectations keep bouncing around

“We are not surprised to see investors’ tentative optimism at the start of this week coincide with USD weakness. We can definitely see how European central bankers are more comfortable than their US counterparts when pushing ahead with a hawkish narrative.” 

“Since the Fed is not offering a hawkish narrative to lean on, market pricing of future rate moves remains strictly tied to news on financial stability. Consequently, Fed rate expectations have become an accurate measure of market sentiment about the banking turmoil.”

“We think that as long as fears of banking contagion remain relatively quiet in Europe, the balance of risks for the Dollar should remain tilted to the downside.”

“We could see markets once again favour JPY for tactical defensive positions.”