Relative interest rate differentials and reIative growth rates are the two most important ones for the market. We believe both still favor the Dollar but it has suffered from a massive drop in the two-year yield even as markets embrace the soft landing scenario.  

In keeping with the relative view, if one is negative on the Dollar, one must be positive on another currency. The Euro and Sterling are two of the top three performing majors year to date. Yet we are beginning to see larger cracks form in these two currencies as well as in the rest of the world.  

This week, comments from two leading ECB hawks suggest the tightening cycle may end sooner than expected. In the UK, stubbornly high inflation is likely to lead to an aggressive BoE tightening cycle that tips the economy into a deep recession. To us, the relative view doesn’t look as good for the Euro and Sterling as it used to.