The dollar may start to rebound amid the rest of the central banks turning dovish, short EUR/USD?

Global rates' differential to determine capital flows toward end of 2018

The current focus for FX Traders around the world should be on how global central banks aim to slow the pace of tightening, instead of projecting how quick the Fed is going to raise the interest rates and whether there will be two or three more. Having more dovish central banks around the world could be the main reason behind a potential dollar rally, more than the impact from the Fed itself.

Last week, two more central bank followed the tone of what ECB offered lately, as both RBNZ and Bank of England pushed back their rates hike expectation by raising the uncertainties of inflation outlook. NZD and GBP tumbled against dollar after the policy meetings. RBNZ kept the official cash rate at record-low of 1.75%, and Governor Adrian Orr said, “the direction of our next move is equally balanced, up or down”. Some traders even view this as “a door opening to cut the interest rate” as its next move. At the same time, central bank pushed back its forecast for inflation goal to be reached by 4Q 2020 from 3Q 2020. Markets aren't pricing in a hike until 3Q19 as it appears not too late in our opinion. Regarding policy changes, we still view the next NZ's OCR move to be a rate hike, that is if a broadening in inflationary pressures continue to materialize, and current global market wobbles not to take a turn for the worse.

For Bank of England, it left interest rates unchanged and signaled it was in no hurry to tighten policy further. Investors in UK money markets priced out the possibility of a rate increase this year after the central bank said that only limited tightening was needed in the coming years. The market-implied probability of a 25 basis-point hike, which was fully factored in for November before the BOE decision, has declined to 85% following the announcement. What is very clear is that the Bank of England has offered a reassurance that it is still data dependent, not model dependent as feared in February. Having said that, whether pound rebounds or not in coming months will be fully dependent on incoming data, especially on the inflationary related ones.