FX Talking: Politics vs Policy

Crosswinds in the FX market suggest EUR/USD should stay volatile within ranges – although probably with a downside bias this month as investors reduce euro exposure ahead of French elections on 30 June and 7 July. EUR/CHF is proving a cleaner vehicle to hedge against election risk and looks to press 0.9500 – especially if the Swiss National Bank does not cut rates this month.

On the subject of rate cuts, we see downside risks to sterling this month when UK May CPI likely comes in lower and the Bank of England signals it is ready to cut rates in August. This could send EUR/GBP back above 0.85 again. And in the rest of the G10 space, our preference would be for outperformance of the commodities currencies whose central banks are last in the queue to cut rates – step forward the Australian dollar.

In EMEA, CEE currencies are suffering on the back of the weaker euro. Yet there remain some strong stories there – especially for the Polish zloty. And the Turkish lira should continue to outperform the steep forward curve, where Turkey has witnessed $70bn of portfolio inflows over the last couple of months. Elsewhere in emerging markets, Latam is busy scrubbing itself off investors’ buy lists and Asian FX remains listless.