The market appeared to have an exaggerated response to the central bank meetings this week. The market interpreted Fed Chair Powell’s remarks as more hawkish compared to the FOMC statement, resulting in a significant increase in the dollar’s value. Yesterday, there was an excessive reaction to the Bank of England and European Central Banks, leading to a significant sell-off of the greenback. The swaps market anticipates three rate hikes this year from the ECB and BOE, along with approximately three basis points of tightening from the Federal Reserve. Despite the sell-off observed yesterday, the dollar has shown a recovery. The uncertainty surrounding the current situation appears to drive short-term market players to avoid taking short positions on dollars as the weekend approaches. Despite assurances from the US and Israel regarding the non-targeting of Iranian oil infrastructure, indications of de-escalation remain minimal. Recently, US Treasury Secretary Bessent alluded to the potential for US control over Kharg Island. Today’s “triple-witching” event introduces a significant factor, with approximately $5.7 trillion worth of options on individual stocks, indices, and exchange-traded funds set to expire. This occurs in the context of an ongoing sell-off in both stocks and bonds.

Following a lack of significant euro selling yesterday and the notable decline during Fed Chair Powell’s press conference on Wednesday, the euro experienced a robust rally yesterday. The asset achieved a six-session peak, nearing $1.1615. ECB President Lagarde appeared to adopt a cautious approach, indicating no immediate urgency. However, certain unnamed hawks emphasized the possibility of a rate hike as soon as next month, a sentiment echoed today by the head of the Bundesbank. It is not merely a single hike; the swaps are now indicating the expectation of nearly three hikes before the year’s conclusion. However, with the weekend approaching and considering the current uncertainties, the short-term market appears reluctant to take a bearish stance on the dollar. The euro has remained under $1.16 today, trading around the $1.1535 mark prior to the North American session. This presents a potential test at $1.15, coinciding with the expiration of options for 1.5 billion euros today.

The yen appreciated to a seven-session peak yesterday as the dollar retraced the gains prompted by Powell’s remarks. The dollar approached JPY160 on Wednesday and early Thursday, before experiencing a decline to JPY157.50 during the North American afternoon session. The 20-day moving average, which the dollar has maintained above since February 24 (~JPY157.75 today), showed signs of weakening. However, the market appeared to have overreacted yesterday, and with Tokyo markets closed for the national holiday, the greenback has recovered to approximately JPY158.90 today. Today marks the expiration of $920 million in options at JPY158.50. Sterling demonstrated a notable recovery yesterday. Following a decline beneath $1.3250 in the initial stages, it surged past $1.3465, marking its highest point since March 10. The 20-day moving average (~$1.3405) was surpassed for the first time since mid-last month. on a five-session high that tested the 20-day moving average (~$1.3400 today). The lack of follow-through in sterling buying today resulted in it remaining predominantly below $1.3440 thus far. Proximity to support is observed in the range of $1.3345-55. The swaps market shifted from nearly flat on Wednesday to reflecting an 80% probability of an interest rate increase by the Bank of England in the upcoming month. Prior to the conflict, the market had already factored in a reduction in April. Three hikes before the end of the year are fully priced in.

Yesterday, the Canadian dollar ranked as the weakest currency among the G10. The performance was essentially unchanged. The US dollar experienced a notable shift in its trading pattern, marking the first session since late January where it did not fall below CAD1.3700. It is maintaining a position above CAD1.37 today amidst low trading volume. Although the dollar reached a slight new two-and-a-half-week peak yesterday, it encountered resistance around CAD1.3750, with the monthly high slightly exceeding this level. The conclusion of the consolidation pattern remains uncertain. Approximately $1 billion is allocated among three strikes: CAD1.3725, CAD1.3740, and CAD1.3750, all set to expire today. The Australian dollar maintained its position at $0.7000 and rebounded to nearly $0.7110 during the North American afternoon yesterday. Tuesday and Wednesday’s highs were approximately 0.7120-25. Today, it is experiencing increased trading activity and has reached session lows, just under $0.7055 in Europe. Nearby support is identified in the $0.7020-40 range.