FX Update: FOMC reaction fizzles. BoE hawkish.

FX Update: FOMC reaction fizzles. BoE hawkish.

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  Fed Chair Powell managed to surprise the market somewhat during the press conference with clear guidance on an imminent start to QE tapering, but the market reaction was fairly muted, with the action overnight and in the European session today suggesting the Evergrande story is still the hobby horse of market attention at the moment. Elsewhere, the Bank of England was about as hawkish as possible, bringing forward already rising anticipation of BoE rate hikes next year.


FX Trading focus: Market brushes off fairly hawkish FOMC. Only eyes for Evergrande?

The FOMC meeting yesterday – or at least the Fed Chair Powell press conference – proved somewhat hawkish relative to expectations. The new FOMC policy statement contained very few changes, the chief one being a hint at the coming taper that has long been expected: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

Elsewhere, the new Fed projections showed two more Fed forecasters (and now nine versus seven in June and therefore fully half of forecasters) pulling their forecast for rate lift-off into 2022. In the economic forecasts, core PCE inflation forecasts were raised 0.2% for 2022 and 0.1% in 2023 to 2.3% and 2.2% respectively, while the unemployment rate forecasts for next year and 2023 were left unchanged (3.5% projected for 2023 and initiated at 3.5% for 2024). This combination saw the US dollar knee-jerking slightly lower and the rate outlook largely unchanged, like chiefly due to the lack of a shift in the unemployment rate forecast, as full employment and signs of a wage/price spiral initiating are seen as key for initiating actual rate hikes.

But it was Fed Chair Powell’s press conference that saw the more hawkish developments as Powell indicated more explicitly that he and many on the Fed are ready to start tapering soon and that it makes sense to complete the taper by the middle of next year, with the pace determined by incoming data. By the end of the press conference, rate expectations had edged some few basis points higher for the Fed funds rate by the end of 2022.

Only eyes for Evergrande for the moment? In the reaction to the above, the USD managed to pull a bit higher and EURUSD traded solidly below 1.1700, etc.. until the news flow overnight and especially in the European session seems to suggest that for the very short term, the market finds the Evergrande story more of a distraction, with a seeming celebration in late Asia and early Europe on a Chinese liquidity injections and the announcement that China told Evergrande to avoid defaulting on near-term USD bonds. Later in the session, we have seen a wobble as China is apparently telling local governments to be ready in the event of an Evergrande fail, and as of this writing, holders of Evergrande’s USD debt have yet to be paid their coupons due today. (a Bloomberg article indicates that covenants allow 30 days delay from the coupon due date before a default is declared.)

Euro Zone and UK flash September PMIs were disappointing today. Markets are holding breath for German elections on Monday, with an interesting vote to be held in Berlin on Sunday which has been dubbed an “expropriation referendum”, as the city’s voters will decide whether to enact an even more widespread effort to force the largest apartment-owners, companies that snapped up formerly state-owned apartments in the 90’s and early 2000’s, to sell these apartments back to the city to provide affordable housing.

Chart: EURGBP
An interesting test of sterling sentiment today as the prior drumbeat of rate expectations ratcheting higher generally failed to support sterling ahead of today’s BoE meeting, which further raised the anticipation for BoE rate hikes early next year. EURGBP recently traded toward key cycle resistance in EURGBP just above 0.8600 before today’s meeting. The BoE was about as hawkish as conceivable (see more below), but is central bank policy relevant to the structural issues that are plaguing the UK right now? In any case, today’s closing levels look important for whether the pair can maintain the range below 0.8600, with the 0.8500 area pivot the next area of interest.

Source: Saxo Group

Bank of England. The Bank of England meeting today was sufficiently hawkish to bring further forward the anticipated lift-off date to as early as late Q1 next year. The recent weeks and even months of rising expectations have done little to support sterling even if it is trying to piece together a solid rally on today’s meeting. The vote on rates was unanimous but 7-2 on keeping the asset purchase target unchanged. The forecast of slightly higher inflation with slightly lower growth this year underlines the central bank’s futility – supply side constraints that it can do nothing about, including labour shortages and the risk of a spiraling natural gas debacle if supplies aren’t secured a t a reasonable cost this winter. Let’s see where GBP closes today – would like to suspend judgment, given that rising rate expectations have thoroughly failed to support the pound recently. As well, an interesting test for the economy lies ahead, with the furlough scheme enacted during the pandemic set to expire this month: arguably, tightening rates does no good if growth continues to stumble and wages fail to match inflation trends. Sterling could prove more sensitive to labour market data from here.

Norges Bank achieved lift-off as expected today with a rate hike of 25 basis points and indicated a bias to hike again in December. Norwegian rate expectations took off further only to fade a bit later in the session, while EURNOK managed local new lows below 10.10 and likely needing a full recovery in risk sentiment (most of the way there in Europe if still rather far from it in the US) as well as new highs for the cycle in Brent crude oil to punch down to the massive 10.00 level and beyond.

Turkey cut 100 bps, surprising consensus. The signals where there from the Turkish central bank’s new leadership that it was looking for an excuse to cut rates by focusing on the lower core inflation levels rather than the headline inflation rate which was still slightly above the 19% policy rate. But hardly anyone, including myself, dared believe that they would actually cut rates today. But cut they did, and by 100 bps and the TRY was immediately slammed for steep losses. This could get messy as the country’s political leadership ones again wades into the situation.

Table: FX Board of G10 and CNH trend evolution and strength
Sterling is making a stand today after its recent bout of weakness but that will take some time to even show up on the momentum indicators here, NOK upside has extended on today’s Norges Bank.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Presented below without comment – plenty of trending questions in flux here.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Aug. Chicago Fed National Activity Index
  • 1230 – US Weekly Initial Jobless Claims
  • 1230 – Canada Jul. Retail Sales
  • 1345 – US Sep. Flash Markit PMI
  • 2245 – New Zealand Aug. Trade Balance
  • 2330 – Japan Aug. National CPI 1830 – US Fed Chair Powell Press Conference
  • 2100 – Brazil Selic Rate Announcement

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.