FX Update: USD shrugs off Fed dovishness, EUR wilts FX Update: USD shrugs off Fed dovishness, EUR wilts FX Update: USD shrugs off Fed dovishness, EUR wilts

FX Update: USD shrugs off Fed dovishness, EUR wilts

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The Fed delivered about all it could in countering recent taper talk and Biden is set to outline a larger than expected stimulus plan later today, and yet the US dollar has largely firmed, especially against the euro, which has stumbled a bit here on new drama in Italian politics. Sterling remains near pivotal levels against the euro, as EURGBP is pushing on important support.

FX Trading focus:

USD: the market largely shrugs off purported Biden mega-stimulus. US rates the key.
Just about all of the available ducks lined up for encouraging some USD selling yesterday with very little reaction in the markets. First, fed officials nearly universally pushed back against any urgency in sending out a tapering signal at this time (Brainard: more purchases “for quite some time” and  economy far away from where Fed wants it to be. Harker: wants 2% inflation before taper talk and dmost importantly Clarida: “greater than 2% inflation for 12 months before rate rises”. The last of these is very interesting, as it sets up an interesting outcome hurdle that could very well come into play and test the Fed’s mettle already this year, if the inflationary outcomes many are predicting. A JP Morgan analyst on Bloomberg TV predicted at least 3% inflation and possibly 6-7% GDP as the Fed enables MMT-esque spending. This is a reasonable list of the factors that could drive that outcome and fits with our picture if the vaccine roll-out gains momentum and is reaching completion for key portions of the population by the end of this quarter. So, let’s say we get a couple of months of 2% inflation in April-May on basing effects from the collapse in prices during the pandemic panic months, and then it begins rising toward 3% within six months, US yield expectations will be rising aggressively and the Fed will find itself in a bind. 

Another USD-negative development is the report from CNN that Biden is planning a larger than expected, $2 trillion stimulus. (Senator Schumer has been circulating a $1.3 trillion plan). There were no details on this (though Biden is set to speak today – should be more meat on the bone imminently). Next, we will have to await comments from key Senators on whether it can pass, given the 1-vote majority there for the Democrats. US treasuries responded to the stimulus talk with a sell-off, but the 10-year treasury auction on Tuesday and especially yesterday’s 30-year auction went off without a hitch, so there is no immediate sense that US treasuries are set for a significant tumble that would send yields up to destabilizing levels. And that really is the key for USD bears, who will need for US yields to stay orderly. Even a move above 1.25-30% could begin to stress asset markets and keep the greenback on the resilient side or stronger.

Another gaggle of Fed speakers is out today, including Chair Powell himself, but not expecting any new signals after the ten or so of the last few days have made it clear that only one or two wants to even talk about tapering, while the rest are in wait and see mode.

I would also like to see this weekend and Biden’s Inauguration Day next Wednesday come and go quietly.

As of this writing, EURUSD Is below local support and the ideal technical test level lower is 1.2065, with the bulls only coming under major fire on a test of 1.2000 and needing to capitulate if below 1.1900.

Italian politics present modest headwinds for the Euro
The Euro is somewhat more on the defensive than many other currencies this morning in the wake of Italy’s Matteo Renzi pulling his small, centrist party out of the country’s coalition. Italian BTP traders bought the dip yesterday, but they’re under pressure again today. There are any number of scenarios in the wake of this development, from the least likely (new elections) to the government finding another party to join, to even Renzi’s party rejoining if the coalition takes up specific policy initiative. Then there is the most intriguing: a broader alliance of parties who appoint a technocratic government with Mario Draghi (!) at the helm. The last is likely to extract the most out of the EU. Stay tuned, but my assumption is that there will be no new EU existentialist blow-up over this.

Chart: AUDNZD weekly
AUDNZD has made an interesting move this week in finally getting some separation to the upside from the 200-day (40-week) moving average. Both currencies have benefitted from the association with the resurgent Chinese economy and rising commodity prices. With global markets trying to look beyond Covid-19 now, despite on-ground realities even in China now with the virus, the premium that NZD received for its early success against the virus is no longer present. As well, AUDNZD yield differentials bottomed out in December and can’t go lower unless Australia plans negative rates without New Zealand doing the same – hardly likely. Then there is Australia’s historic shift to a current account surplus in late 2019 after running large external deficits for decades, move not mimicked by New Zealand, although the latter’s current account has improved to the upper end of the twenty-year range. Further mean reversion from a valuation perspective could take the pair into the zone above the key 1.0800-50 level and even to 1.10+ in the next few months, with longer term potential above 1.1500 if we see an extension of the commodities inflation in iron ore, coal and LNG for the balance of 2021.

Source: Saxo Group

The vaccine race
As we noted on the Saxo Market Call podcast this morning, Israel bears watching as the country farthest along of any complex economy in vaccinating its citizens, with nearly a quarter having received at least the first dose of a vaccine. Perhaps no coincidence, the Israeli shekel (ILS) has been on an absolute tear in recent weeks, and just before pixel time, the Bank of Israel is out announcing that it will buy $30 billion in foreign currencies through 2021 – oops, squeeze risk.

In the US, a handful of states have administered the first dose to more than 5% of citizens, and the most populous states are mostly in the 2-3% range. Too slow. Elsewhere, sterling could be getting a boost in part due to its aggressive move on vaccinations, while the EU is stumbling badly on the front in aggregate. Watching that EURGBP range support below 0.8900 for further developments – I like the pair lower for two to three figures.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1330 – US Weekly Initial Weekly Jobless Claims and Continuing Claims 
  • 1400 – US Fed’s Rosengren (non-Voter) to Speak on economy 
  • 1530 - US Weekly Natural Gas Storage Change 
  • 1600 – US Fed’s Bostic (Voter) to Speak on panel 
  • 1730 – US Fed Chair Powell to Speak 
  • 1800 – US Fed’s Kaplan (non-voter) to Speak 
  • Very late: US president-elect Biden to Speak on stimulus priorities 

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.