A 125 bps narrowing in the Fed/ECB rate gap must be Dollar-negative – SocGen

Kit Juckes, Chief Global FX Strategist at Société Générale, analyzes G5 growth and policy rate forecasts and their implications for the FX market.

Sluggish resilience but lower rates will weaken the Dollar

G5 growth and policy rate forecasts spell out the sluggish growth clearly enough, but the prospect of a 150 bps cut in Fed rates next year stands out and by comparison with elsewhere. 

A 125 bps narrowing in the Fed/ECB rate gap must be Dollar-negative – and there’s room for the forecasts to be very wrong and for the rate gap to narrow more than the market prices in! 

A significant cut in Fed rates will also (eventually) reverse a decent chunk of the policy move which took USD/JPY up here.