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The hot new season trend in FX markets is strong currencies. Nations are no longer striving to weaken their currencies in order to secure a share of decreasing export markets. Instead, the inflationary and direct costs of increasing energy prices have prompted policymakers to reconsider FX policy.

The dollar is very much on-trend, boosted by energy independence and a market move toward the Fed’s own hawkish views for stronger monetary policy. Expect the dollar to strengthen in the next months, as well as the energy export complex to outperform.

China and the yuan stand out in this regard, but the UK and the US are also headed in this way as monetary policy normalizes. Because the United States has mostly achieved energy sufficiency during the previous decade, it is better positioned than many others to weather the energy price concern.

Nonetheless, the Federal Reserve appears to be taking the inflation danger more seriously, presenting a set of Dot Plot predictions for the Fed Funds goal in September that were significantly higher than market expectations.

The market’s adjustment to the Fed should be a key support for the dollar in the coming months. We are also upgrading our dollar projections until the end of 2022.

In Europe, the European Central Bank has yet to go beyond its ‘transitory’ stance on inflation, and we believe EUR/USD will be sensitive to 1.13 in the coming months. 

A more hawkish Bank of England believes the pound is better positioned to resist dollar pressure. However, our team is sceptical that the BoE will act as soon as the market anticipates. The EUR/GBP range may continue low at 0.8450/70. 

However, where a nation stands on the energy export/import grid and how central banks plan to respond to inflation will remain key to FX markets. The two are linked via income shocks and production disparities.

Norway, Canada, and Russia are all well-positioned. Japan and Turkey are also in a bad condition. We anticipate that these fundamental tendencies will persist.