NEW YORK (BBH FX Strategy) -- The dollar is broadly weaker against major currencies, with moves still confined to recent ranges with the exception of sterling. The euro broke above the 1.3350, rising for three consecutive sessions and returning to the level at the start of the month.
With the link between growth and job creation looser than historical and academic models suggest, we continue to believe that it would be necessary to see either a marked deterioration in conditions, suggesting a new recession, or a re-emerging threat of deflation before a new round of asset purchases by the Fed becomes possible.
This represents a big turnaround from the ruling Fidesz Party's hostile approach to banks and is part of Prime Minister Viktor Orban's charm offensive ahead of a possible large debt sale and talks with the International Monetary Fund. The signs seem to be pointing to an IMF deal, but we think this has been fully priced in. We expect trendline support near 289 level to be tested and perhaps broken in the short term as positive sentiment continues. Still, we recommend caution as fundamentals remain weak and policy-makers face a combination of slow growth and high inflation. The central bank meeting later Tuesday should prove to be a nonevent, with rates held at 7.0% as widely expected. However, markets will be looking for signs that the bank is tilting more dovish after one MPC member voted to cut rates 25 basis points at the last meeting.