Forex trends reveal the US dollar held steady against the euro and the yen on Monday.

The USD reverted to a more typical pattern after that notoriously volatile week in the foreign exchange market that had been driven by shifts in policy and geopolitics.

Forex trends – Bank of Japan policy

The yen continued to be a focal point in forex trends, a week before Japan’s central bank, the Bank of Japan (BOJ) reviews policy this Friday.

The yen was trading not far from the 34-year low against the dollar it reached on Wednesday and if it were to breach the 155 level at all, intervention from Japanese authorities seemed like a real possibility.

Latest forex news – US dollar hits its highest level

Forex trends – BOJ changing to inflation

And, according to the changing forex trends, it seems that the BOJ will not introduce a significant stimulus measure in the short term.

The increasing likelihood of a Fed rate cut has been reflected in a somewhat weaker US dollar, especially after US inflation figures came in hotter than the markets expected.

Fed officials have been tweaking their own guidance on rate cuts, too.

The forex market also reacted to the easing of tensions over the Middle East that took tension out of some of the world’s other most common assets – gold, crude oil and the greenback – after Tehran this week scaled back the damage from an attack by Israeli drones, potentially preventing a regional conflagration.

Forex trends overall were more volatile last week than they had been for weeks, reflecting both a geopolitical ‘perfect storm’ and extensive monetary intervention.

This week sees attention turning away from forex trends somewhat with major US corporate results and headline economic reports in the pipeline, including the US first quarter GDP and PCE index.

One of the major themes of this year’s International Monetary Fund/World Bank meetings was the enduring strength of the dollar – a topic that might well play out in forex in the months to come.

The preoccupation with the strong dollar in the forex market today is a reminder of the economic implications of the currency market’s current ‘panic’ – any sign of weakness in the US economy is liable to turn market expectations on their head.

The pound held steady against the dollar and strengthened slightly against the euro on Monday, continuing recent forex trends of volatility.

The addition of a dollar-sterling rate gained traction in late 2012 after several years of negotiations. Sterling stood unchanged at $1.2367 early GMT on Monday after dropping to a five-month low last week.

In early London trading, recent forex trends showed sterling at €1.1745, nearly half a euro cent higher than the previous day. A recent report from the US markets regulator showed a relatively neutral position on sterling.

The pound’s gyrations stand out in starker contrast to the euro, after taking the dollar out of the equation. Sterling went into 2024 3% lower against the greenback, primarily reflecting a stark repricing of the possibility of a cut in US rates.

Forex flows indicate that investors forecast roughly two big cuts by the Bank of England this year, slightly less than the Federal Reserve and slightly more than the European Central Bank.

Despite a recent softening against the euro – where sterling’s lead has significantly shrunk – sterling is up 0.45% against the euro single currency, while forex trends showed the euro slightly higher, up 0.1% to 86.21 pence against sterling.

Forex trends will be coloured by next week’s economic flashpoints including the preliminary business activity surveys out tomorrow, which will affect sterling.

The UK continues to beat all of the major economies on purchasing managers’ surveys, which have all been above 50 month to date, with the UK having bested the United States each month this year.

The Bank of Japan (BOJ) is due to revise its inflation forecasts on Friday, keeping its projection for inflation around its 2% goal for the next three years, an indication that forex trends are set to continue and that interest rates will remain near-zero while they wait for them to be raised.

The new BOJ governor, Kazuo Ueda, is widely expected to maintain the bank’s data-dependent policy, leaving open the possibility of further interest-rate rises in the future, until core wage increases across the service sector are more assured and the resulting effects on prices can be clearly mapped.

Ueda underscored this cautious stance in the most recent seminar in Washington, noting that the BOJ would still carefully consider the macroeconomic impact of recent policy adjustments before considering further rate moves.

This approach jibes with macro-oriented forex trends.

The BOJ wrapped up its long-awaited turn away from unprecedented stimulus last month, yet it will probably leave its short-term interest rate target of between 0-0.1% in place after its two-day meeting later this week.

Forex trends could also be affected by the BOJ’s next projections from the tankan quarterly survey of business conditions.

The BOJ is likely to reduce its forecast for this year’s economic growth because of sluggish output and consumption.

However, it might raise its inflation forecasts for fiscal years 2024 and 2025 slightly, expecting more wage hikes.

Despite Kuroda’s recent entreaty to the private sector to pass on some of the benefits of cheap yen directly to consumers, the timing of any rate hikes remains the key focus for forex markets this year; after all, a hike could come only if the current deflationary and recessionary stance of the Japanese economy starts to turn, perhaps by the latter half of the year.

The signal that forex markets would be watching would be whether wage growth starts to exert some inflationary pressure on service prices in general, a movement that is mirrored in wider forex markets.

On top of that, the slide in the yen adds another possible twist to the BOJ’s policy path, with market speculation about an earlier-than-desired rate hike to rein in the yen’s descent.

Though Ueda has dismissed directly targeting the yen in policy decisions, he also noted that impacts from a weaker yen on import prices could demand a policy tweak, code for another possible rate hike.

Forex trends are watching for a durable inflation trajectory towards BOJ targets.

A more gradual approach to policy changes is cautiously explored by analysts like Nada Choueiri from the International Monetary Fund, who balances growth and inflation risks.

This careful strategy may be easier to execute when the central bank is already engaged in the delicate task of balancing various economic indicators in service of forex trends, which is precisely the situation that the BOJ has committed to.

In early trade on Monday, the Indian rupee advanced marginally on dollar sales by foreign banks, a normal movement in line with ongoing forex trends.

The rupee rose to 83.4325 against the U.S. dollar at 10:00 am IST from the previous session’s close of 83.47, after falling to another record low of 83.5750 on Friday before bouncing back because of massive RBI intervention, traders said.

Contributions to the rupee’s rise included heavy dollar selling by foreign banks that could possibly be acting as agents for their custodial clients.

Activity like that is a feature of forex trends, since big institutional players tend to make strategic moves at times.

However, despite the support, upside for the rupee has a limit so long as US bond yields remain elevated, with forex trends suggesting continued volatility.

Nothing too dramatic across the wider Asian currency market though, which has been stablilising after fortnight-long nervousness about Islamist attacks on Saudi oil facilities.

And in forex, that nervousness is underlined by a steady dollar index, which does keep above 106, and a rise in the yield on the 10-year UST.

In rupee trends, analysts monitored key levels of resistance, citing 83.20 as near-term resistance for the rupee. Meanwhile, dollar-rupee forward premiums also responded to rising US bond yields that are crucial for setting forex trends.

Moving forward, forex trends and trading decisions are likely to be informed by the upcoming US personal consumption expenditure inflation data release on Friday.

This is particularly important as it will shed light on the possibility of Federal Reserve rate cuts, and consequently, forex trends and the direction of the dollar against the rupee.

On Monday, the Swiss National Bank (SNB) raised the minimum reserve requirement for domestic banks by 1.5% points from 2.5% of their estimated total deposits to 4%, a move that is expected to save the central bank around 600 million Swiss francs ($659.05 million) a year in interest it pays banks for holding the reserves.

These ever-changing forex trends and changes seek to optimise the structure of financial regulations.

Since the banks are not paid any interest on the amount deposited to meet the requirement, these new deposits will not generate any interest costs for the SNB.

The revision is part of larger measures to shore up the strength of Switzerland’s banking sector, especially after the upheaval fuelled by the spectacular collapse of Credit Suisse – and its subsequent sale to the rival bank, UBS.

Shares in UBS were down more than 1.5% in early trading, trailing the broader European banking sector, which shows that the forex market is sensitive to changes in banking laws.

Only in the coming months might we be able to form a view on how this change might affect the banks’ performance.

The SNB also stated these changes, which will become effective on 1 July 2014, ‘would not change the current monetary policy stance’.

The revised regulations also require that the minimum reserve ratio now includes in full outstanding liabilities related to cancellable customer deposits, excluding tied pension provisions, when formerly only 20% were included.

In other words, the calculation of reserves has been changed, which could be indicative of an evolution of forex conditions and regulation in Switzerland.

Governors of the European Central Bank (ECB) are reportedly worried that they will be politically pressured to publish interest rate forecasts, as is done by the US Federal Reserve via its ‘dot plot’ system.

The multi-government structure of the eurozone with its divergent political priorities – unlike the single-government jurisdictions of the U K and the US – helps to explain some of these worries.

It is a third key feature of our forex story. Transparency and independence from political meddling are of paramount importance.

Isabel Schnabel, a member of the board of governors of the European Central Bank in Frankfurt, recently suggested that the ECB follow the Fed’s practice of publishing ‘rate path’ projections to improve information to the markets.

But almost every one of her ECB colleagues feel that such transparency would compromise the Bank’s cherished independence by making individual governors ‘hostages’ to potential political pressure.

This is a particular concern in the foreign exchange arena where such pressures might skew perceptions of the central bank’s monetary policy impartiality.

The principle has some supporters, but most ECB governors are wary, aware of the tension between transparency and the need to stay isolated from national politics, which is important for stable forex trends.

Among the ECB’s prophylactic measures are anonymizing meeting accounts of policy decisions and not making vote splits clear, to shield its governors from undue political influence.

In advance of the ECB’s next review, there is still no consensus about whether and how to introduce the dot plot, or indeed to consider alternatives.

Clustering dots into ranges will partially hide the position of an individual board member, which might help shield the ECB from political interference, but increase transparency – a conundrum that has immediate consequences for forex trends, by shaping market expectations and influencing the stability of the eurozone.

On the other hand, other central banks, such as the Bank of England and the Bank of Korea, are also searching for ways to refine their interest rate guidance techniques, as are global forex regulators, with the ultimate goal of achieving increased clarity and transparency while attempting to also maintain the independence that determines all the trust and success in global forex markets.