News & Analysis


As expected, Fed Chair Powell’s testimony in Congress was the main event for FX markets on Tuesday. Similarly, in line with expectations, the Fed Chair offered little change in tone relative to his commentary in Sintra. Admittedly, Powell’s characterisation of two-sided risks looked a little more dovish at the margin, reiterating a need for more data to justify monetary easing, but balanced against an increased focus on the downside risks to growth. Even so, this was insufficient to deliver the necessary shift in Fed easing expectations needed to drive any significant dollar action. Today, Powell heads to the House of Representatives to deliver a repeat congressional appearance, though given yesterday’s performance, any fireworks look unlikely. This should see price action across G10 FX remain subdued ahead of Thursday’s CPI release, a development that could see some reengagement with short-term carry currencies like MXN and BRL which have seen a notable positioning flush out over recent weeks.


The kiwi has been the big G10 mover overnight, dropping six-tenths against the dollar as the RBNZ surprised markets with a policy statement that proved more dovish than expected. Granted, policymakers kept rates on hold for the eighth straight meeting. But a suggestion that inflation would return to within the Bank’s 1-3% range in the second half of the year and that monetary policy was weighing on domestic demand more than expected, caught markets by surprise. The upshot is that traders now see the odds of an August rate cut at 60%, a notable jump on the 25% chance predicted before the RBNZ’s latest decision and a move that is weighing heavily on NZD in early trading. Even so, the Bank’s optimism on inflation appears overstated to us, meaning we continue to think the RBNZ will be amongst the last major central banks to cut rates this cycle, and that this morning’s kiwi weakness is likely to prove temporary.


The euro softened at the margin through Tuesday trading, easing one-tenth on the dollar against a backdrop of limited data flow and elevated political risk in France. Similarly muted price action should be in store today too if the data calendar is to be trusted with only a handful of second and third-tier data prints due out of the bloc, none of which are likely to significantly move the euro. Nevertheless, we are inclined to think that short-term risks for the single currency are skewed to the downside for two reasons. First, Chinese inflation data overnight came in soft, suggesting that a pickup in external demand is unlikely to come to the rescue of a struggling eurozone economy. Second, French political risks will continue to haunt the euro as coalition negotiations drag on, driving home the message for traders that passing legislation through the National Assembly will be challenging given its new makeup. All told, this should see modest pressure on the euro ahead of tomorrow’s US CPI release, which should be the main event for EURUSD traders starved of meaningful market catalysts this week.


A speech by Bank of England Chief Economist Huw Pill at 14:30 BST is set to be the main attraction for sterling traders today. As we see it, Pill is likely the swing vote on the MPC at present, meaning his view on inflation developments over the BoE’s recent quiet period will be key for determining how markets view the odds of an August rate cut and the Bank’s subsequent easing path. Admittedly, his commentary in August had tilted towards the more hawkish end of MPC views, suggesting the balance of risks ahead of today’s speech is not entirely clear cut. But Pill’s most recent interventions just before the purdah period had begun to tilt more dovish, and we think it is significant that his more historic commentary warned against overinterpreting late-cycle resilience in inflation indicators. This latter point is key, with data having largely proven stronger than expected over recent weeks. If repeated today, we expect to see markets more-or-less fully price a cut in Bank Rate next month, an outcome that should see the pound trading significantly weaker this afternoon.


A light data calendar saw USDCAD trade in a tight range once again on Tuesday, with neither cross-asset dynamics nor Chair Powell’s testimony in Congress offering much direction for the pair either. Much of the same looks to be in store today too, despite more upcoming commentary from Powell, the odds of him delivering meaningful new information that could spur price action in advance of tomorrow’s US CPI release looks limited to us.



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