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By and large, last nights Fed meeting went broadly as expected. The rate statement skewed in a hawkish direction, with the Fed now characterising recent data as showing a “lack of further progress towards the Committee’s 2 percent inflation objective”, while they also slightly tweaked how they framed the balance of risks, noting that they “have moved into better balance over the past year” as opposed to actively “moving into better balance. However, attentive to the risk that sounding overly hawkish will cause ruptures in financial markets, the Fed maintained its stance that it policy is “sufficiently restrictive” but now needs to remain at current levels for longer. On balance, this should have kept the dollar stable, however two additional developments saw the greenback selloff in a substantive manner yesterday. First, the Fed chose to slow the rate at which it reduced its asset holdings, with the taper modestly faster than anticipated. This helped lower bond yields. Second, and compounding the impact of the QT announcement, Chair Powell went one step further in his guidance, noting that it is “unlikely” that the next policy move is a hike. While stating the obvious and confirming the sentiment already shared by NY Fed President Williams, Powell’s comments seemed to have sparked a relief rally in markets. This saw the DXY index drop half a percent following yesterday’s decision, essentially reversing Thursday’s rally following the stronger employment cost index data.
The most sizable move came against the Japanese yen. Already gaining on the back of lower Treasury yields, the yen suspiciously broke close to 3% lower at 21:00 BST when Powell was already out of the spotlight. With markets on high alert for BoJ intervention following Monday’s price action, some analysts are ascribing the move once again to policymakers. While we note that the Bank’s previous intervention efforts in 2022 were topped up days later, the timing of the move after Powell had finished and when the yen was already moving in the right direction for officials leaves us dubious.
Despite yesterday’s price action, our base case for continued steady dollar appreciation stands as we don’t see the Fed cutting rates before September’s meeting at the earliest. With data likely making the monetary outlooks clearer in other DM economies, we suspect higher yield levels and moderately widening spreads will support the dollar, even against the Japanese yen where we see the latest potential intervention efforts aimed at slowing the pace of yen depreciation and preventing a full blown confidence crisis as opposed to supporting a particular level.
Today should see some relative calm return to markets given the economic calendar thins out ahead of tomorrow’s ISM services PMIs and April’s payrolls release. That said, US fixed income markets and USDJPY should still promote uncharacteristically high volatility in G10 FX for a quiet data day.
EUR
The single currency shot up four tenths of a percent following yesterday’s Fed meeting to close above the 1.07 handle. While the move higher was initially faded, the sharp selloff in USDJPY promoted another spurt of strength. While traders may find some comfort trading EURUSD above 1.07 today given Powell essentially ruled out further hikes and central banks in Asia are actively working to dampen the effects of a stronger dollar, we doubt the euro can sustain these levels into the weekend. By all accounts, tomorrow’s payrolls report should be hot, and while that may contrast with cooler ISM services PMI data should it match the S&P measure last week, this should keep US yields from slipping back too substantially. We continue to favour fading rallies above 1.07 as a result.
With very little on the eurozone economic calendar apart from a speech by ECB Chief Economist Philip Lane at 21:15 BST, price action in EURUSD will be left to cross-asset forces and broader dollar dynamics today. As a result, focus for European traders this morning rests on the Swiss franc, where data for April showed another surge in inflation pressures. Headline inflation rose 0.3% MoM, leaving the annual rate to jump 0.4pp to 1.4%, while core inflation also rose contrary to expectations by 0.2pp to 1.2%. While we are yet to delve into the details of the report, which matter given administered prices and energy effects in Switzerland, its notable that the latest increase in core inflation follows a notable acceleration in sequential domestic and core inflation pressures. While we will need more time to confirm with the data, at first glance it looks as if April’s CPI report may have dented the possibility of another SNB cut in June. If confirmed within May’s report, released just two days prior to the SNB’s next decision, stronger domestic inflation pressures may prevent EURCHF from reaching our Q2-end target of 0.98. For now, however, we see this as a blip in the road and confirmation that the pace of CHF depreciation from here will be gradual.
GBP
The pound enjoyed a brief flurry of strength in yesterday’s session, but continued to underperform the euro which is more sensitive to US rates given how wide EURUSD spreads are currently. While sterling continues to lag the move against the dollar this morning, we think price action, especially in GBPEUR, is prime for a turnaround. While that may not be forthcoming this week given little data is released in either the UK or the eurozone, next week’s data calendar should confirm our bullish GBPEUR view as Q1 GDP data is likely to show the UK rebounding from its 2H23 slump with more vigour than the eurozone, while we suspect the BoE should sound moderately more hawkish than eluded to by Governor Bailey and Deputy Ramsden a fortnight ago.
CAD
With Governor Macklem continuing to hold his cards close to his chest when speaking in front in Parliament yesterday, price action in USDCAD was determined by developments in the US. With markets interpreting yesterday’s Fed decision as dovish, this saw USDCAD drop moderately by 0.3%. While the pair’s momentum lower has extended into this morning’s session, we are hesitant to shift our bearish CAD call just yet. After all, the Fed confirmed that they are unlikely to cut before September at the earliest, and despite Macklem’s best efforts to contain easing expectations, we doubt the BoC will be able to cut fewer than twice before the Fed even thinks to begin easing. While Governor Macklem is set to stand up again in Parliament today at 08:45 ET, we doubt he will deviate from yesterday’s message. This leaves USDCAD at the mercy of the broad dollar heading into the weekend, which on our view of strong payrolls data tomorrow, should see the pair close the week near recent highs.