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Market thinks the Fed's resolve is wavering

Forex 9 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  A speech by Fed Chairman Powell was interpreted as dovish by the market, even if somewhat unfairly so. Regardless, the market feels it has picked up a signal and the USD is sharply weaker as risk appetite celebrated. This weekend’s G20 meeting could either spike the punch bowl further or instantly drain it.

In a speech yesterday, Fed Chairman Powell put what the market felt was a new spin on his view of the Fed’s policy rate, which he described as “just below the broad range of estimates of the level that would be neutral” rather than previous rhetoric, suggesting his view that the rate was far from neutral. This is rather less dovish than the headlines shouting the “just below” portion of his comments out of context.

Still, Powell’s rhetoric suggests a range of possibilities: perhaps Powell really is second guessing his prior, more pointed comments because he finally does see risks materialising that warrant a bit more caution beyond the December rate hike. Also, the policy description is far more passive and less direct than his usual style – is Powell finally starting to change behavior due to the pressure supplied by Trump’s expression of dissatisfaction with Fed “tightness”?

Regardless, the market has decided to take the comments and style change and run with it, pricing out some seven basis points or so of tightening through the balance of 2019 as expectations are shifting increasingly in favour of one or even no further hikes through the December 2019 meeting after an assumed hike at next month’s meeting. 

In reaction to Powell’s speech, risk appetite has gunned higher, the USD (and somewhat less so the JPY) is under renewed pressure and the traditionally risk-correlated currencies are enjoying a significant bid, led within the G10 by AUD and NZD, where there is perhaps also a hope that this weekend’s G20 meeting produces a supportive breakthrough.

Sterling tried to put in a rally as the UK parliament will have the option to forward and vote on motions  –  like calling for a second referendum – ahead of the December 11 vote on the May deal. The broad rejection of this deal by key swing voters in parliament suggests that it has no chance of passage, which points to perhaps four scenarios, assuming the May deal fails:

– A “no deal crashout” – market more concerned than previously but reluctant to price this into anything save for implied volatility.

–  A second referendum – increasingly likely, but what are the choices, the May deal versus reverting to pre-Article 50 status quo?

–  An attempt at a last ditch “Norway-style” deal, with a declaration that a state of national emergency that enables the UK to retain control of its immigration (more akin to a “Liechtenstein-style” deal). This would be the UK having its cake and eating it too and the EU would be against this…

– No deal, but a significant delay of the deadline to avoid a crash-out, with new elections possibly on the agenda and head-scratching on how to restart the negotiation process.


AUDUSD snapped to attention again as the market marked down the anticipated pace of Fed tightening at coming meetings. We’re still not clear of the recent range and need to see détente or better in the US-China relationship at the G20 meeting tomorrow and Saturday to get further traction higher. Given still heavy and increasingly stale speculative shorts out there, a further squeeze might easily overtake the 200-day moving average and pull the pair well north of 0.7500 if a rally sticks past this weekend’s events.
Source: Saxo Bank
The G-10 rundown

USD – the worst combination for the greenback is a marking down of Fed expectations and strong risk appetite. If these conditions extend more USD downside will follow, but this could suddenly pivot on G20 headlines if no thaw in the US-China trade showdown is in evidence as next week rolls into view. The Federal Open Market Committee minutes tonight will read like “ancient news” given the slide in oil prices in the interim and Powell’s updated comments.

EUR – EURUSD could gun for 1.1500 resistance here, but a full break into the 1.1700-1.1800 range would likely require a breakthrough at the G20. The euro is unlikely to show high beta to a weaker USD relative to riskier currencies.

JPY – the JPY is only gently higher versus the US dollar on lower US yields as the focus on strong risk appetite blocks a stronger response. AUDJPY is making a bid at breaking resistance.

GBP – Bank of England governor Carney waxed max gloomy on Brexit risks yesterday, suggesting the pound could fall to below parity versus the US dollar as the UK economy shrinks. Feels like scare tactics to help the UK change its mind? Tory Brexiteers certainly seem to think so.

CHF – a different angle on the franc suddenly, as Swiss GDP reported negative -0.2% for Q3 versus a modest rise expected. This and the strong bounce in risk appetite are offering EURCHF modest support. 

AUD – the Aussie is leading the charge against the suddenly weaker USD and bulling into key areas in AUDUSD as we indicate above.

CAD – signs of a climax reversal in USDCAD as yesterday’s new local highs were strongly rejected. Oil, risk and G20 need to line up for a retreat back to the 1.3000 area.

NZD – NZDUSD is making a bid above its 200-day moving average. NZ building permits data up in very early Asian hours tonight.

SEK – the Sweden Q3 GDP release is printing just as we are writing this and copying Switzerland with a -0.2% QoQ result. This is not the news SEK bulls needed for a December Riksbank rate hike, the heavily favoured scenario ahead of the data. 

NOK – we need a bigger boost in the NOK to get a sense that EURNOK will stay in the range below 9.80. The “G2 of oil exporters”, Saudi Arabia and Russia, are putting their heads together at the G20 as well, and signals will be closely watched after the ugly slide in prices that has kept NOK heavily offered of late.

Upcoming Economic Calendar Highlights (all times GMT)

0830 – Sweden Q3 GDP
0855 – Germany Nov. Unemployment Change/Rate
0930 – UK Oct. Mortgage Levels
1000 – Eurozone Nov. Confidence Surveys
1300 – Germany Nov. Flash CPI
1330 – US Oct. PCE Inflation
1330 – US Initial Weekly Jobless Claims
1500 – Mexico Central Bank Minutes
1900 – FOMC Meeting Minutes
2005 – Fed’s Kaplan (Non-voter) to speak
2145 – New Zealand Oct. Building Permits
0100 – China Nov. Manufacturing and Non-manufacturing PMI


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