The FX market’s sensitivity to central bank policy continues to amaze Kit Juckes, Chief Global FX Strategist at Société Générale.

Dollar could be in for 2-3% more upside from here

If the market embraces the idea that the Fed’s projection of three cuts this year is what’s going to happen, then the Dollar’s in for 2-3% more upside from here, and EUR/USD could test 1.0500 at some point. 

In practise, of course, there are two sides to the argument and the ECB’s pushing back at rate cut expectations every bit as hard as the Fed is. So too, are most central bank policymakers, except for the BoJ, whose Deputy Governor is stressing that an end to YCC and negative rates would not signal the start of a series of policy moves. 

I doubt the end of YCC and negative rates can be achieved without some upward pressure on the Yen, but clearly, the move from USD/JPY 152.00 to 127.00 in late 2022/early 2023 has left scars.