If so-called US exceptionalism has been responsible for US dollar strength in recent years, there are signs that this exceptionalism could be diminishing ever so slightly. Data for Q1 GDP revealed a continued decline in the pace of US growth while the euro zone and UK have both emerged from the recessionary quagmire that we saw in the second half of 2023.

In fact, in the case of the UK, the growth rate in Q1 exceeded that of the US; something that we have not seen since the first half of 2022 when the US endured a technical two-quarter recession. The UK GDP outcome in Q1 2024 also exceeded market expectations while the US data for the same quarter underperformed market forecasts. Now clearly, as the saying goes, one swallow does not make a summer, meaning that this rebound in the UK and the euro zone could prove temporary.

Nonetheless, this rebalancing of the growth situation should help to maintain the very stable relationships that we have seen between the dollar and the euro, and the US dollar and the pound. This rebalancing could also act as an important counterweight as interest rate divergence develops for we expect both the ECB and the UK to reduce policy rates before the Fed, with the ECB expected to cut in June, the BoE in August and the Fed in September. This could be of significance for if there are risks to any of these forecasts they appear to lean in the direction of an earlier rate cut from the BoE and a later cut from the Fed.

But while economic and monetary policy factors might point to continued currency stability between the US dollar and major European currencies, the same cannot be said for political influences. November’s presidential election in the US still stands out as the elephant in the room for the dollar. Opinion polls in the key swing states still point to a victory for former president Trump and, if that’s realised, there will be a huge amount for the FX market to contemplate including tax cuts atop an already high budget deficit, across-the board tariffs, much more protectionist pressure against China, questions over Fed independence, uncertainty about war funding for Ukraine and even speculation that a Trump-led administration could seek to drive down the dollar.

In Standard Bank’s view, this is almost too much for the market to contemplate beforehand and it is likely to mean that the greenback flatlines through to the November 5th election unless, that is, the outcome of the election becomes far easier to predict, enabling the market to price in the impact of the likely outcome beforehand. It feels that such discounting will prove difficult and Biden is more likely to emerge victorious even if opinion polls put him behind at the moment. Should this prediction prove correct, we would expect the US dollar to start drifting down after the election, probably pushed by faster policy easing from the Fed.

While many major European currencies are remarkably stable against the US dollar, the same cannot be said about the yen. Intervention has been tried and had a reasonable degree of success in halting the US dollar’s advance at 160 but it seems that the BoJ is starting to realise that intervention needs to be accompanied by supportive monetary policy in order to bring substantive change. This is arguably why BoJ Governor Ueda has started to suggest that yen weakness could push the Bank to tighten policy again; something he was reticent to admit in the past.

In addition to this, the BoJ sent out another hawkish signal by reducing the amount of JGB’s it was willing to buy in regular purchase operations for the first time since December. Tying rate hikes and reduced bond purchases to the weakness of the yen could help the BoJ get more bang for the buck as it tries to resist damaging yen weakness.

The most recent data on the positioning of non-commercial traders on the IMM suggests that some caution might be creeping in as the number of short-yen contracts was reduced by the most in four years. The Standard Bank’s sense is that the Japanese authorities will slowly gain traction in turning US dollar/yen around such that the US dollar slips to 130 over the course of the coming year.