US FX WRAP: Dollar falters amid US/Iran agreement ahead of a slew of G10 central bank decisions

The Dollar was weaker on Monday as positive developments in the Middle East improved risk sentiment after the US and Iran reached a framework peace agreement that is expected to be formally signed in Switzerland on Friday. While full details have yet to be released, reports suggest the US will lift its naval blockade while Iran will reopen the Strait of Hormuz. As expected, developments surrounding the US-Iran agreement dominated FX trade and broader market sentiment, with participants also beginning to look ahead to Wednesday's FOMC decision. While rates are widely expected to remain unchanged, attention will focus on Chair Warsh's first meeting as Fed Chair, with some desks expecting the Committee to remove the easing bias from its policy statement.

Elsewhere, the NY Fed Empire Manufacturing survey disappointed, with the headline index falling to 5.7 from 19.6, well below the 13.2 consensus. The underlying details were mixed, with new orders and shipments declining sharply while prices paid eased.

G10 currencies broadly advanced against the Dollar on the improved risk backdrop. The Yen pared earlier gains ahead of the Bank of Japan decision overnight. While a Reuters survey showed 66 of 70 economists expect the BoJ to raise rates to 1.0% this month, market participants remain focused on the accompanying guidance and the pace of any further policy normalisation. Money markets currently imply around a 90% probability of a rate increase.

The commodity-linked currencies underperformed, with CAD and NOK among the laggards as crude prices tumbled following the US-Iran agreement. 

In contrast, AUD, CHF, EUR and GBP were among the strongest performers. The Aussie was supported by the broader risk-on backdrop ahead of the RBA decision overnight, where policymakers are expected to leave rates unchanged. The Pound was also supported by the risk tone ahead of key risk events this week. UK CPI is due on Wednesday, ahead of Thursday’s BoE confab, and the Makerfield by-election results Thursday evening. The Swissy was supported after the nation voted to reject a proposal to cap its population at 10mln, avoiding issues with the EU while the Dollar weakness also supported.