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FX Update: Yellen steals the spotlight as Powell ignored.

Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  Not only does the Powell Fed face the impossible task of deciding whether to communicate measured caution with a rate hike or more significant caution with no rate hike today, the guidance task for what it will do next is even more challenging. To boot, the market reaction function to today’s FOMC decision and guidance may prove far from straightforward. Elsewhere, hot UK CPI this morning has market pricing near certainty of BoE hike tomorrow.

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FX Trading focus: Fed hikes, but clearly shifts to neutral on introduction of new language in the statement and despite maintaining policy forecasts for now. Treasury Secretary Yellen steals the spotlight with comments on not insuring all US bank deposits.

The Fed went ahead with a 25 basis point hike as most expected and this raised few eyebrows. Somewhat more interesting was the introduction of new language in the FOMC statement that clearly spells out new concerns that the recent turmoil will impact credit transmission into the economy and therefore growth/employment. The following insertion into the statement can be read as a shift to neutral:

“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain.“

Those statement changes and the inference we can make from them outweigh the lack of any notable shift in the Fed’s policy forecast.  If the Fed begins to see confirming evidence of a sharp slowdown in the April and May data cycles (much higher risk), its tune and forecasts will change rapidly. Also note that the Fed did mark down the 2023 GDP forecast to 0.4% from 0.5% in December and the 2024 GDP forecast to 1.2% from 1.6% in December.

But Yellen comments in a Congressional hearing that was held simultaneously with the Fed Chair Powell presser quickly hogged the spotlight yesterday as she stated “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits”. That was not the kind of language the market was looking for and bank stocks immediately hit the skids, taking broad market sentiment sharply lower as well. This statement raises the risk of more widespread and intensifying runs on vulnerable banks, with unpredictable speed. The situation will of course only be allowed to get systemic up to a certain point before intervention arrives to save the day, but the speed and path to some new crisis apex is completely unpredictable. And most importantly, the credit tightening this will bring has likely brought forward the US recession by at least 3-6 months and aggravated its potential severity.

The Yellen rhetoric revived the US dollar a bit late yesterday from its low level, even if the USD dropped again overnight (in part on hopes for the Chinese re-opening getting traction now). Today in Europe, the greenback has in turn unwound a considerable portion of the overnight losses. A US crisis is a difficult thing for currency traders to deal with: yes it impacts Fed rate expectations and is more negative at first blush for the US specifically, but financial conditions deteriorating in the US won’t stay bottled up there, nor will forward concerns for the US economy. The USD can clearly still find bids if sentiment wobbles badly, and there are justifiable concerns that some of the dynamics for banks are not unique to the US. This is quite clear in the impact on bank shares everywhere.

EURUSD shot up to well above 1.0900 yesterday from a base below 1.0800 as the FOMC statement release provided lift. Then, we saw considerable volatility on the Yellen statements on not insuring all bank deposits, before a brief new spurt higher overnight and then erasure of that move in Europe today. A rocky ride indeed!. European banks have not escaped negative pressure and also bear watching in the EURUSD equation. For now, I am far from convinced of any notable upside potential if we are on the cusp of new turmoil here. Technically, the rally needs to hole 1.0750 or so to keep the 1.1000+ focus.

Source: Saxo Group

This update is coming out just ahead of the Bank of England decision, which may or may not produce a grudging hike from Governor Bailey and company, but likely little drama in the immediate forward path and not generally the market focus here. Sterling has been on its back foot over the last few days versus the euro, even as the GBPUSD chart impresses, with the EURGBP more compelling for giving us the lay of the land for the currency. Don’t see any notable upside potential for sterling here from any identifiable source, certainly not from a hawkish turn from the BoE. It would likely take at least a couple more months of hot inflation and possibly wage data for the discomfort with their aggressive view on disinflation to rise to untenable levels. (BoE forecasting 1% headline inflation in two years!) Downside risks prevail if the negative attention on banks spreads to Europe and the UK, though the UK has the advantage of more nimble regulatory/government action if the pressure worsens.

The Swiss National Bank hiked 50 basis points as widely expected (nothing to see here…) hoping to pretend that all systems are normal just after avoiding a systemic melt-down by “aiding” UBS’ takeover of Credit Suisse. The Bank signaled that more tightening “cannot be ruled out”, though SNB is most likely to be a laggard rather than a leader in all monetary policy shifts. After a bit of CHF firmness, EURCHF is back mid-range on the day.

Norges Bank hiked 25 basis points as expected to take the Deposit rate to 3.00% and surprised hawkish with guidance for an increase to 3.50% in the summer, though it did cite “considerable uncertainty about future economic developments”. Norwegian short rates got hot and bothered for a bit to the upside, but eased back to barely above unchanged as of this writing. NOK was solidly bid as EURNOK slid from 11.33 before the announcement to as low as 11.255 before bouncing.

Table: FX Board of G10 and CNH trend evolution and strength.
Still holding out for the Friday close to draw conclusions on the greenback as we need to watch for follow on impact of what Yellen said yesterday. Watching sterling status after today’s Bank of England as well (though data is simply dragging the BoE around grudgingly, so expecting little drama unless Bailey and company refuse to move and indicate they are pausing for now).

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
NZDUSD is trying to flip negative again already, and RBNZ forward guidance is a prominent risk for NZD in two weeks a the next meeting. EURGBP has made an about face and looking higher ahead of BoE today.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1200 – UK Bank of England Rate Decision
  • 1230 – US Weekly Initial Jobless Claims
  • 1400 – US Feb. New Home Sales
  • 1400 – Sweden Riksbank Governor Thedeen to speak
  • 1500 – Eurozone Mar. Consumer Confidence
  • 2330 – Japan Feb. National CPI
  • 0001 – UK Mar. GfK Consumer Confidence


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