FX Crosscurrents: The Impact of Global Central Bank Decisions

Welcome to the MUFG Global Markets FX Week Ahead podcast with Derek Halperny, Head of Research, Global Markets, EMEA and International Securities. It's Friday, June 19th, 2026, and joining Derek to pose some questions on the financial market themes for the week ahead is Niko Jan Thiensen, Global Client Sales. This material is only intended for professional investors in jurisdictions in which its use is permitted under applicable laws, rules and regulations.

It has been produced for information purposes only and should not be construed as investment research or advice. MUFG EMEA disclaimers and disclosures can be located on our website. Hi Derek, how are you?

I'm very good, Niko. How are you? Yeah, not bad.

Thank you. How are you in this very busy central bank week? So it has been very busy.

We had RBA, Bank of Japan, Fed, Riksbank, Bank of England, S&B, and looking at what happened over the last days, big move in the dollar, probably the Fed meeting was the most important one. What are your thoughts on the FOMC outcome and, you know, especially rate-wise, what do you expect the Fed to do? Yeah, like I totally get the reaction in the markets.

I think the DOTS profile and the median DOT profile was really the clincher in terms of the market move. Since the DOT profile began, the first one was published back in 2012, we've never had a bigger shift from one publication to the next in terms of moving from, you know, nobody expecting a hike in the March DOT profile to nine expecting a hike in this one. So it was a dramatic shift and I think that certainly spooked the market.

Kevin Walsh himself, you know, he clearly doesn't like forward guidance and he didn't give a DOT in the profile. So the statement was shorter and, you know, he's launched these reviews of different aspects of Fed's functioning and policy. So we're in for some significant changes, but he did keep reiterating or he kept reiterating the need for price stability and saying that the Fed would achieve price stability.

So yeah, all in all, it was hawkish. But do we really believe or should we put a lot of emphasis on the DOT profile, which is probably going to be abandoned relatively soon? And was that DOT profile shaped in any way by the fact that there was a change in leadership?

I certainly think there could have been an attempt to send a message that, you know, it's the whole FOMC and in that sense, you know, we're still back to, I guess, the data going forward and ultimately inflation and the labour market. And, you know, it's our view that inflation has in or around peaked and through the rest of this year, we should see some disinflation in the annual rate as the energy drop feeds through, but also OER corrections weaker and the tariff impact from last year also kind of falling out of hand. So I think inflation drops back.

So I don't think we're going to get a hike from the Fed. So in that sense, I would argue that the upside for market rates is relatively contained from here and therefore the scope for sustained US dollar appreciation is fairly limited as well. If I just go back to remember from what the drivers you had for dollar weakness last year and then at the beginning of this year, a number of them are still in place.

Maybe short term interest rate differential in the short term helped the dollar to rally a bit. But the other drivers, if you can elaborate on those, fiscal problems, et cetera, they're all pretty much intact for longer term trend. Yeah.

And of course, like I think that the interest rate differential driver that's helping the dollar will peter out. But then I think, yes, the other factors that we've mentioned, fiscal uncertainties for sure. Like obviously you've got the cost of the conflict, but not just the direct cost, but also the fact that we have higher inflation, therefore we've got higher yields and higher financing costs and ultimately that deteriorates the fiscal outlook, which was already appalling based on the IMF projections with the deficit running at 7-ish percent through until 2030, 2031.

Then on top of that, policy uncertainties, Trump unpredictability, we've got the midterm elections in November, the Republicans will probably lose the House, will they lose the Senate as well? Trump is a kind of a lame duck type president of the White House, if they did lose both houses of Congress, could certainly create more unpredictability going forward in that context. And then, of course, this memorandum of understanding in relation to the ceasefire between the US and Iran, Iran is coming out reasonably well from this.

I don't think that's particularly favorable for credibility of the Trump administration as well. So, yeah, there are those other factors, which I think certainly argues the case that foreign investors' appetite for hedging US dollar exposures going forward will still be pretty strong. Now, rates is obviously important from a cost of hedging perspective, but those other factors I think certainly encourage the prospects of renewed dollar hedging flows going forward.

Maybe if we, specifically in Europe, we have quite a bit of corporates that we're talking to, Eurodollar is for them, I guess, the main currency pair here. If I just look at the Eurodollar, we just talked about the dollar side. On the Euro side, we had the ECB chief economist coming out.

That looks more like a potential additional rate hike as well, right? The same, the neutral rate is higher than we had previously been led to believe. Yeah, I thought that was probably one of the most important central bank comments of the week, saying that the kind of high end range of neutral has moved up to 2.5%.

So, in other words, if they did decide to go again, they'd still be broadly in a neutral range. So, the ECB obviously would be arguing that it's worth doing that as insurance against the Middle East conflict re-escalating and crude oil rebounding again. And yeah, in that sense, I think it certainly keeps the prospect of another hike alive.

The fact that they've gone once, it nearly, they'd be reluctant to stop at one because then it looks like a mistake. Even in the context of the fact that crude oil prices have dropped back down, if they're now saying, well, you know, we're kind of still in neutral, they would argue that there's limited risks in terms of adjusting that a bit higher from where we are now. So, I still think that they'll probably hike again, but of course, crude oil is still important.

And if we continue to move lower from these levels, which I'd be surprised, but if we did, I mean over the next month or two, then it could become more difficult. Okay. Okay, then let's maybe move on to, you know, of the corporates on the continent, Euro is a functional currency, so the Euro crosses are relevant.

The dollar has strengthened against, at the moment, at least short-term against the Euro. One of the currency pairs that everybody has in mind is Euro-Yen, which, you know, has been more or less going up for many quarters now in the big scheme of things, and many have been waiting for Euro-Yen to come lower. Now, we have a little bit of a Euro-Dollar correction to the downside.

What is going on the Dollar-Yen front? We're sitting at 161-ish. Is there a scenario in which we see short-term a Euro-Dollar a little bit lower, but a Dollar-Yen stable and an opportunity to get into, you know, to hedge Euros against Yen?

What's the Dollar-Yen view here? Yeah, well, you know, yesterday we got up to 161-81, so 14 pips from the high in 2024. So obviously the question is, are the MOF there to intervene and stop the level from breaking?

And you've got to say, given the fundamental backdrop, given the rise in front-end yields in the U.S., given the broad momentum for the U.S. dollar, I think it's perhaps foolish to come in and intervene at these levels. So I think there's definitely a risk that they could stand back and allow this level to break and to move higher and maybe look at levels, I don't know, 165-ish, a break of 165 perhaps. Something like that where, you know, the short-term froth and speculative positioning gets even bigger because it's certainly grown and there is that justification for intervention based on what the MOF and the government have said in the past.

And, you know, the IMM weekly data has the leveraged funds yen short position now back at the same level as in July 2024 when they intervened and we saw a bigger move to the downside for dollar-yen for different reasons. So yeah, I think taking it to euro-yen, Nico, in that context, obviously, I wouldn't expect euro-dollar to be moving down at the speed in which dollar-yen would be moving up if we break that, the high 61.95, then I think, you know, we could certainly see euro-yen go from 185 to 190-ish, you know, you could definitely get that type of scenario. So yeah, if I was speaking to a client, I would say, look, I think there's a high chance we're going to get a pop higher in euro-yen from here.

And then obviously, you know, further out based on fundamentals changing, like what I said earlier about the US dollar and the Fed and rates, you know, then maybe you could start to see euro-yen turning lower. Bank of Japan, what do we expect for the rest of the year? Well, you know, the yen has weakened obviously on the back of the right hike that we got this week, which would imply disappointments in the markets and still fears of the BOJ being behind the curve.

I don't entirely agree with that. If you look at spreads like curve spreads, 2's, 2's 30s, 2's 40s and JGBs, you know, we have seen a fairly notable reversal of the steepening. So the better stability and long-term rates would certainly suggest there's less fears amongst investors over long-term inflation, which of course would tie in with the fact that crude oil prices have dropped 30% in the last month or so.

So I don't think the inflation fears are as high as they were before, and indeed there was an element of hawkishness to the meeting, but I don't think it changes the dial in terms of the speed in which they raise rates, which is basically every six months roughly. So I think December, which is close to fully priced, is a reasonable timing for the next move. So we certainly shouldn't expect the BOJ to come to the rescue of the yen by being more hawkish or hiking more quickly.

That onus is going to have to be with the MOF. Great. Let's maybe move over to Sterling, an important by-election.

So Andy Burnham is now an MP. Is he going to be the PM? Yes.

Basically, in a nutshell, yes. You know, he's stood in this by-election for one reason, one reason only, and that's to launch a leadership challenge to Keir Starmer. And I would expect that to unfold over the coming weeks and for that process to run through the summer and for potentially Andy Burnham to be in position for the party conference season, which is kind of late September into October.

Keir Starmer says he's going to run. I wouldn't. Yeah, like I think he might be thinking that now.

I'm not necessarily sure that will end up being the situation. If a good majority of the cabinet are against him staying, the pressure will certainly amount for him not to run in a leadership election. If it becomes plainly obvious that he's not going to win, I think he could step aside.

I think for FX and for the gilt market, it's back to credibility, fiscal credibility. Andy Burnham has promised to maintain the self-imposed rules on fiscal spending. So if that's credible and if that's kept, then I think the gilt market can remain stable.

But, you know, in the history of recent politics, you'd have to argue that there's a risk at some points there could be a wobble. Maybe some of the fiscal plans lack credibility possibly. But I think there's definitely a danger there that we could get some politically related kind of volatility and that could certainly weigh on the pound.

And rates are up over the week in several markets. But the sterling today, the yields are quite a bit higher, right? I think, what is it?

Yeah, like there is, there has been a reaction, I think maybe because of the scale of his victory. But, you know, I think yields are higher everywhere. I think, yes, they're a bit higher in the UK.

But, you know, we've scrapped our call. We thought the BOE would raise rates this year. But the meeting this week, the CPI data, the second consecutive week of unexpected CPI print makes us believe that the Bank of England can probably stay on hold through this year.

So that's good news. And in that context, it's a positive for the gilts market, perhaps. But I would still argue that euro sterling should be drifting higher.

But we've been in this painfully narrow range. I was looking at one month implied vol, Nico, for euro sterling. It's like the smidgeon over 3%.

It's a record. It's close to a record low. But yeah, I think if we do get a move, I would expect it to be to the upside for euro sterling.

Okay. That's great. Well, okay.

Very good. Thanks a lot. And I think we've covered most topics of interest and then have a good week.

Indeed. Yes. Thanks, Nico.

Have a good weekend. Cheers. Bye bye.

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