The euro remains under pressure and falls against the dollar

While cross-asset volatility has been relatively high over the past month, a large proportion of this has been driven by fluctuations in bond markets, where concerns over global growth and inflation conditions are most visible. At the end of April, the ICE Bank of America MOVE index, which measures the implied volatility in bond markets for the next month, climbed close to the peak seen in early March after the onset of war in Ukraine.

For further context, at 130, the current level of the MOVE index is just 10 points short of levels last seen during the onset of the pandemic. 

At that point, bond market volatility was so disruptive that central banks decided to directly intervene, buying assets in the open market to improve market functioning. This time around, bond market volatility hasn’t risen solely on central banks’ expected responses to the latest inflation shock caused by the Ukraine war, but also growth risks in major economies such as China and the eurozone. 

With recession risks rising over the medium-term, monetary policy is hard to pre-determine. And then, even when the policy moves are largely expected by fixed income markets, the corresponding FX impact hasn’t been straightforward, as highlighted by the divergence in market reactions for CAD and NZD back on April 13th after both central banks hiked by 50bps, meeting expectations. 

The gyrations in bond market pricing have been influential for FX markets given that interest rate differentials continue to be the dominant driver of FX price action. However, it is not just rate differentials that have resulted in a stronger dollar over the course of April, but spikes in broader market volatility. Amid these uncertain conditions, the dollar’s safe haven attributes are acutely visible, especially in the context of a stronger US economic backdrop and a perceivably more hawkish Federal Reserve. 

This has resulted in not only a 5-year high in the DXY index, which can skew the represented performance of the dollar due to its narrow composition, but a stronger dollar across the expanded majors space over the course of April.

FORECAST