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However, last week we saw a massive re-pricing of Fed expectations, with December Fed fund futures down 11bp to 66bp, which in turn pushed USD bulls away - recall the Fed’s median expectation is 100bp.
Both central banks are expected to ramp up exchange-fighting language, however which of the two do we believe will actually act? The ECB will only act if inflation (in the April 30 CPI estimate) stays around 0.5% - the market and ECB expects a rebound at this print (although no Bloomberg estimate yet). If inflation rebounds I don’t think the ECB will ease policy until EUR/USD rallies to 1.42 to 1.4500, with negative deposits first off the rank and QE (buying private assets) if EUR/USD manages to rally to 1.4500 - even with negative deposits.
The RBA will increase its FX fighting rhetoric on moves above 94 cents, as the pair becomes ‘uncomfortably high’. Aussie CPI (timed mean) comes out next week and there is a good chance we see this pullback from a 0.9% pace in Q4 to 0.6 to 0.7% in Q1. The prospect of lower inflation and strong AUD suggests the RBA will get more impact from jawboning than the ECB. A weaker inflation print won’t see it move from the neutral setting, but it would get more bang for buck from jawboning. Recall Glenn Stevens said that AUD/USD should be closer to 85 cents than 95 cents.
Either way, a closing break of the downtrend at 1.4810 could be how traders will play this, adding on a close above 1.4990.