Head of FX Strategy
Summary: The Bank of England and ECB meetings were both dovish surprises as the two banks are seen looking for an excuse to pause their tightening regimes, in the ECB’s case after a further 50 basis point hike in March, and in the Bank of England’s case, ASAP. The US dollar rebounded sharply as the FOMC meeting suddenly looked less dovish by comparison. A test of the dovish central bank narrative today with the January US jobs report and ISM services on tap.
Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: The BoE and ECB surprise dovish. USD resets.
The Bank of England and ECB both surprised on the dovish side yesterday. First the BoE: as expected, it raised the rate by 50 bps to 4%, with a vote of 7-2 as two of the usual doves favoured keeping the rate unchanged. The Bank eased up on its forward guidance, saying that further policy tightening “would be required”, but only “if there were to be evidence of more persistent [inflationary] pressures” and preceding all of that language touting “considerable uncertainties” in the outlook. The previous language was more direct on the need to continue hiking. In setting pre-conditions for another rate hike, the bank strongly suggests it is looking for reason to pause its tightening cycle after yesterday’s decision. This was a dovish surprise, prompting the market to punch UK 2-year yields some 25 bps lower and 10-year yields a massive 30 bps lower. At the same time, the Bank of England is looking for goldilocks outcomes for growth and inflation, raising the GDP forecast up to a mild recession of –1% peak-to-trough versus –2.9% previously, with unemployment seen peaking at 5.3% versus 6.0% previously. The accompanying MPR saw a downgrade to the 2023 inflation forecast to 4.0% from 5.25% with inflation of just 1.5% next year. The Bank of England seems very impressed with what it delivers and is likely over estimating the impact of its policy tightening. Either its inflation forecast or its growth forecast will prove woefully optimistic (i.e., if inflation does indeed achieve 1.5%, it could likely only be in the context of a crushing recession) or both!
The ECB development was in a similar dovish vein and with very hawkish expectations ahead of the meeting, the ECB already had a high bar to surprise hawkish. While the European Central Bank raised rates by 50 bps to 2.50% and somewhat oddly committed to another 50 bps rate hike in March, the statement said that at the March meeting, the ECB will evaluate the subsequent path of its monetary policy. This sent out a message that the most hawkish G10 central bank currently may also be looking at stepping down its pace of rate hikes, while the pre-committing to another 50 basis points in March was likely an effort to corral the hawks on the Governing Council. At the presser, Lagarde attempted to stress, somewhat similar to the Fed’s “higher for longer” guidance, that rates would stay at high levels, but the market is pricing the ECB to roll over with rate cuts in 2024 as well, if at a later date and with less amplitude than the Fed. Markets sharply marked down the market pricing for 2023 with around 25 bps of ECB tightening taken out. Reuters sources later noted that ECB policymakers see at least two more rate hikes, with an increase of 25 bps or 50 bps in May, but German 2-year yields still ended the day 18 bps lower and the 10-year Bund yield slumped 20 bps.
In reaction to the above, the US dollar has reset higher, essentially wiping out the FOMC reaction to nil in the case of the EURUSD, while sterling has lurched lower versus both the US dollar and the euro, as GBPUSD cuts back into the range that extends well below 1.2000, while EURGBP has now broken higher, with only the extremes of the trading range during the PM Truss-wipeout providing upside resistance. The ability of the US dollar to follow through broadly higher will depend on whether US data proves more resilient than expected and leads to a reheating of inflation fears and forces the market to revisit its expectations from the Fed and/or in general, whether risk sentiment can continue to melt-up after the wild extension of the last couple of days, or is set for a reversal. In that light, strong data surprises in either direction today from the US will offer a compelling test of the narrative.
Chart: GBPUSD
GBPUSD has lurched to new local lows after the long period of trading bottled up in the 1.2275-1.2450 range as the Bank of England clearly wants to pause its rate tightening regime and forecasts inflation to collapse to well below 2.0% next year. The natural focus lower is the round 1.2000 level, but more significant technically are the 1.1950 area 200-day moving average and then the pivot low from earlier this year just below 1.1850.
Table: FX Board of G10 and CNH trend evolution and strength.
Quite a hefty change of pace after yesterday’s action, as the USD weakness violently reversed, while the JPY maintained altitude on the sharply falling yields in Europe. It would take quite some doing to work the greenback into a positive trend, however. Elsewhere, the sterling downtrend has picked up pace and EURGBP, one of the two key sterling pairs, is in new territory post-PM Truss wipeout.
Table: FX Board Trend Scoreboard for individual pairs.
Compelling to watch USD pairs over the next few sessions for a significant consolidation after the remarkable 13-week up-trend in EURUSD, the most extensive of all the USD trends, but nearly matched by gold (huge bearish reversal yesterday) USDJPY and USDCHF. GBPUSD looks the first major USD pair to have a look at tilt lower after the troubled Scandies SEK and NOK have already wobbled into downtrends versus the greenback.
Upcoming Economic Calendar Highlights
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
