Global Head of Macro Strategy
Summary: The FOMC meeting this week forced the market to adjust to the idea that the Fed could continue to take rates higher than had previously been priced. But clearly, to drive tightening expectations higher still, we’ll need to continue to see hotter than expected US data, with today’s US jobs report the next test on that. Elsewhere, sterling is in a world of hurt after BoE’s very dovish guidance.
FX Trading focus: US incoming data focus after hawkish FOMC. BoE in dovish pushback against market hike expectations.
The US dollar followed through stronger yesterday on the momentum off the back of the hawkish Powell presser Wednesday, but has come in for a chunky reversal overnight and today since a somewhat softer than expected ISM services survey yesterday (nudged lower to 54.4 vs. 55.3 expected and 56.7 in September, with the employment sub-index dipping back below 50 at 49.1 vs. 53.0 in September). Wouldn’t it be ironic if we also were to get a soft US jobs report today that takes US yields back to their starting point of the week, making Powell’s hawkish message so much noise, at least until the next incoming data point jerks the market the other way? Interestingly, the USD is selling off ahead of today’s US data releases even as short US yields are posting new highs for the cycle
Specifically in today’s jobs report, in addition to any strong directional surprise in payrolls (multi-month grain of salt needed with this data series, as single releases require further corroborating evidence), we should keep both eyes on the average hourly earnings survey. Arguably, if we get the expected 0.3% month-to-month average hourly earnings print today after a couple of prior prints of a similar size, observers may begin to judge that the annualized rise in earnings is beginning to look far less threatening at sub-4.0%. The year-on-year is expected to drop to a 15-month low of 4.7% today. A significant upside surprise in earnings is perhaps could generate significant volatility.
Chart: EURGBP
Worth considering how the dovish Bank of England meeting yesterday (see more below) is weighing heavily on sterling, as it should, with the Bank of England reluctant to signal much tightening energy when it sees an incoming recession. Sterling is down sharply across the board, with EURGBP suddenly well backed up within the old range and now far away from the sub-0.8600 range support. The next area between the 0.8800 and pivot high of 0.8870 area looks key for whether sterling weakness is set to become a bit more unhinged, and the next key event-risk test is likely how the market greets an austere Autumn budget statement on November 17.
Bank of England wrap. The BoE hiked by 75 bps to 3%, as most expected and as was mostly priced in, but Bailey and company strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and it speaks volumes that even though the BoE pushed back against the forward implied expectations for further tightening, which it said would trigger a 2-year UK recession, the market did not budge those expectations. In short: the market refuses to acknowledge what the BoE thinks it might do, probably figuring that the BoE will have no choice due to sterling weakness but to pursue the path to 4.50% or higher rates before mid-next year. I was surprised by the lack of discussion or journalist questioning in the press conference around the risk that currency weakness drives worse inflationary outcomes if the BoE fails to do as much as the market is pricing. Sterling remains in a heap of trouble.
Table: FX Board of G10 and CNH trend evolution and strength.
The USD needs to stick the move off the back of the FOMC meeting after the US jobs data today, otherwise we’ll suddenly be back to square one. The hottest movement in FX was clearly the sterling sell-off yesterday on a very clearly dovish Bank of England meeting. CNH is making waves on a lot of movement overnight and noise (unconfirmed) of an eventual opening up.
Table: FX Board Trend Scoreboard for individual pairs.
While the US dollar flipped to a positive trend in many places, we must still consider the risk that incoming data complicates the plot. GBP is already registering a negative trend in many new GBP pairs after yesterday’s BoE meeting. Interesting that the NOK failed to roll over to the downside in a couple of key pairs after the small hike from the Norges Bank yesterday.
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