Starting from the Australian central bank (RBA) meeting on Tuesday, then the BoE and ECB meetings on Thursday.
The US dollar index (DXY) pulled away from its 18-month high in trading earlier this week (31/January). The market volatility eased, while traders and investors awaited the announcement of the results of the policy meetings of several major central banks over the coming days.
Expectations of a Fed rate hike in 2022 peaked during last week's trading, sending the US dollar rate soaring to a record 18-month high. Money markets are currently pricing in a 90 percent chance of four Fed rate hikes by the end of the year, as well as a 67 percent chance of five hikes.
"USD 'smiles' again, based on a combination of a recalculation of interest rates and weaker risk sentiment," analysts at Barclays said in a weekend note cited by Reuters.
Looking ahead, Barclays estimates that the potential for a further US dollar rally based on the expectation of a "rate hike" will tend to be limited. The risk-on-risk-off sentiment in equity markets could push the US dollar even higher, but last week's USD moves signal that the Fed's "aggressive" rate normalization cycle is already factoring in the current USD rate.
Meanwhile, market participants will also highlight several central bank meetings that may lead to crucial decisions. Starting from the Australian central bank (RBA) meeting on Tuesday, then the BoE and ECB meetings on Thursday.
Markets expect the RBA to end its Quantitative Easing program in announcing the results of the meeting tomorrow morning. But finalizing QE alone may not be enough to be a catalyst for the Aussie, as the real focus lies on whether the RBA will prepare to raise interest rates.
The UK central bank meeting has the potential to be a bigger catalyst, as the majority of analysts expect another 25 basis point BOE rate hike. If expectations are realized, GBP/USD will not necessarily jump. However, if expectations fall, Cable seems to have room for a landslide.
The announcement of the results of the next meeting from the ECB is likely to be quieter. Consensus does not expect any policy changes from the European central bank, although there is always a chance for surprises at a key event like this.
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