From Dollar to Yen: Answering Policy Questions From Around the World

The European Central Bank delivered a 25‑basis‑point hike on Thursday, a move fully priced into markets but heavily clouded by the ongoing Middle‑East conflict. Policymakers warned that any rapid escalation or a sudden drop in energy prices could force a swift policy pivot, so they stopped short of signalling further tightening. Front‑end euro rates and the EUR/USD pair barely moved, reflecting the market’s expectation that the ECB will adopt a data‑driven, cautious stance until the geopolitical risk eases. This measured approach keeps euro‑dollar spreads tied to underlying yield differentials rather than headline surprises.

In the United Kingdom, the Bank of England is expected to leave rates unchanged at its June meeting, with a split vote hinting at a possible hike later in the year. Inflation expectations remain sticky, and the labour market shows early signs of weakening, prompting the MPC to prioritize second‑round effects. Meanwhile, a high‑profile by‑election in Makerfield adds a political layer to fiscal policy, as investors watch for any shift in the government’s borrowing rules. The euro‑sterling and euro‑dollar pairs stay within their historical ranges, driven more by yield curves and political risk than by domestic growth.

The Fed’s June gathering will likely be a hold, but the market’s hawkish tone reflects stronger-than‑expected US data – robust non‑farm payrolls, upbeat ISM surveys and a surprise uptick in job‑openings. New chair Waller is expected to trim forward guidance, offering a more neutral statement while the dot‑plot may show a modest median rise, keeping the DXY near the top of its range. NatWest’s house view still projects a rate cut by year‑end, betting that labour market momentum will fade and service‑inflation will recede, tempering the dollar’s upward drift.