Monetary policy divergence like what we have seen in the BoJ-Fed has proven to be a strong directional driver of FX rates. The ECB is set to deliver a rate cut in June while there is uncertainty to whether the Fed will ease late this year or not at all
Fed officials didn’t overreact to one or two data points of hot inflation back in February, why would we expect it to react positively to a good inflation print in April. Not to mention that supercore prices rose faster
Having both central banks going through different circumstances would mean there is room for policy divergence and directional trading. Well its not evident yet, price action is delivering the lowest ranges YTD, an early May session was the tightest since January 1st in EUR/USD
Both measures of implied and realized volatility have dropped to near YTD lows. The 1m tenor is down on the day by 20bps on the day to 5.198%, 1m 10D BFs stand at 23.5bps. Today, the EUR/USD structure is down across tenors vs 6mo ago, when central bank pricing had converged into +100bps rate cuts
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