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FX Update: Hawkish Powell speech jolts rate expectations, but little else.

Forex 5 minutes to read
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John Hardy

Head of FX Strategy

Summary:  A speech on Friday from Fed Chair Powell jolted the expected time frame for Fed rate lift-off forward, although it did little for the US dollar outside of a bit of stabilization, and the JPY is near the top of the two-week range against the US dollar as long US yields are well behaved. This week, the focus will be on the Bank of Canada and ECB meetings Wednesday and Thursday, respectively, as the next big load of US data arrives only next week.


FX Trading focus: Market shrugs off Powell’s hawkish remarks. UK fall budget

On Friday at a virtual conference, Fed Chair Powell offered up a set of remarks that are the clearest sign yet that the Fed’s previous guidance on “transitory” inflation is disappearing fast and that the Fed wants to transition as quickly as it can to a more flexible stance. While Powell stated the no-brainer that he is ready for Fed tapering to begin and reiterated the base case that tapering will take until mid-next year, other bits of rhetoric in his speech reveal the Fed’s growing discomfort on inflationary risks. First was the admission that supply-chain snarls have gotten worse and will extend far longer than originally expected, but Powell spelled out the general risk to the idea that we are going to watch a taper “like paint drying” this time around before rate hikes arrive mid next year in his statement that the Fed will “need to make sure that our policy is positioned for a range of possible outcomes.”

As of this writing, the market is about 50/50 on a rate hike on or before the June FOMC meeting next year. This helped support the US dollar at the margin, perhaps as the Fed has been a late arrival to the “guidance shift party” relative to the more forward leaning central banks that have already shifted and even hiked. And a more hawkish Fed may continue to provide little impact, as long as the shift is a bit of a laggard relative to other central banks, as long as risk sentiment somehow takes this all in stride and especially, as long as US longer treasury yields remain rangebound. I’m far from convinced that the latter are sustainable if rate expectations continue to ratchet higher from here – with data next week possibly the next critical test, but let’s see.

UK Fall Budget Statement up on Wednesday. An important test for sterling this week in the shape of the UK fall budget statement from Chancellor Sunak on Wednesday ahead of next Thursday’s Bank of England meeting, for which the market is unwinding expectations for a rate hike to more balanced expectations for a move then or a wait until December after recent confusing headlines from a variety of BoE speakers – particularly the jolt last week after Governor Bailey hawkish comments. The September Short Sterling contract is some 16 basis points off the lows from las Monday, for example. Classically, fiscal austerity is currency negative and while Sunak is expected to both offer up plans that support some of the most disadvantaged in the UK on the rise in heating costs and for those last bits of the economy still directly affected by covid disruptions as well as longer term spending objectives linked to the climate and , but the more impactful part of the budget statement will be on the degree to which Sunak vows to put the UK back on track to fiscal sustainability with higher taxes and other measures, in part made necessary by the rising costs of servicing debt and as some fiscal outlays will automatically rise anyway as they are indexed to inflation.

Chart: GBPUSD
An interesting test for sterling through next Thursday’s Bank of England meeting after recent BoE comments have seen an incredibly aggressive ramping in anticipated rate hikes and in the wake of this week’s budget statement as discussed above. Cable has reversed back higher after the sequence below 1.3650, but has yet to take out the 200-day moving average a bit higher. A particularly hawkish budget statement from Sunak could keep sterling on its back foot, though there a quite a few support levels of note all the way back to at least 1.3575, while we also watch the meeting next for the degree to which the Bank of England supports the market’s assessment of the forward UK rate curve – all while risk sentiment remains an important coincident indicator that has been an important support – if not the chief support – of the comeback off the sub-1.3500 lows.

25_10_2021_JJH_Update_01
Source: Saxo Group

Escalation in EU-Poland conflict at the weekend after the Polish Prime Minister Morawiecki says the EU Commission is risking a “third world war” in threatening to withhold EU recovery funds from Poland over accusations of Poland not complying with EU rule-of-law norms, especially the independence of the judiciary. Despite complaining that the EU was effectively negotiations with a “gun to the head”, Morawiecki did promise to dismantle a disciplinary chamber for judges by the end of the year, something the EU Court of Justice’s had deemed illegal. EURPLN is higher today, but looks relatively calm given the circumstances, trading near the middle of the recent range as we await further developments. Poland reports October CPI on Friday.

EM extremes – elsewhere in EM, the Turkish lira was gutted at the open of trade this week on President Erdogan threatening the ambassadors of 10 countries that included the US, Germany and France over their call for the release of a jailed political opponent, adding to the damage done by last week’s larger than expected rate cut in Turkey. At the opposite extreme, the Russian Central Bank’s avowal to nip inflation in the bud with a larger than expected rate hike of 75 bps has taken the policy rate to 7.5% and the USDRUB rate below 70.00 for the first time since a brief episode after wild post-pandemic outbreak swings last year.

Table: FX Board of G10 and CNH trend evolution and strength
The negative JPY trend reading has eased significantly over the last week as long yields have remained orderly, while the US dollar is in danger of tilting into an outright downtrend on another blow or two in key major USD pairs. Note the loss of momentum from CAD and NOK despite oil prices trading new highs to start the week – these are trends that need constant feeding to continue – particularly the quite stretched NOK.

25_10_2021_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Little to report here, although we watch EURUSD closely for the chart to make a statement now that the trend is flipping back and forth as the pair traded recently up against the key 1.1650-1.1700 upside swing zone.

25_10_2021_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Sep. Chicago Fed National Activity Index 
  • 1300 – UK BoE’s Tenreyro to speak 
  • 1430 – US Oct. Dallas Fed Manufacturing survey 
  • 2300 – South Korea Q3 GDP 

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