FX Trading focus: Market shrugs off Powell’s hawkish remarks. UK fall budget
On Friday at a virtual conference, Fed Chair Powell offered up a set of remarks that are the clearest sign yet that the Fed’s previous guidance on “transitory” inflation is disappearing fast and that the Fed wants to transition as quickly as it can to a more flexible stance. While Powell stated the no-brainer that he is ready for Fed tapering to begin and reiterated the base case that tapering will take until mid-next year, other bits of rhetoric in his speech reveal the Fed’s growing discomfort on inflationary risks. First was the admission that supply-chain snarls have gotten worse and will extend far longer than originally expected, but Powell spelled out the general risk to the idea that we are going to watch a taper “like paint drying” this time around before rate hikes arrive mid next year in his statement that the Fed will “need to make sure that our policy is positioned for a range of possible outcomes.”
As of this writing, the market is about 50/50 on a rate hike on or before the June FOMC meeting next year. This helped support the US dollar at the margin, perhaps as the Fed has been a late arrival to the “guidance shift party” relative to the more forward leaning central banks that have already shifted and even hiked. And a more hawkish Fed may continue to provide little impact, as long as the shift is a bit of a laggard relative to other central banks, as long as risk sentiment somehow takes this all in stride and especially, as long as US longer treasury yields remain rangebound. I’m far from convinced that the latter are sustainable if rate expectations continue to ratchet higher from here – with data next week possibly the next critical test, but let’s see.
UK Fall Budget Statement up on Wednesday. An important test for sterling this week in the shape of the UK fall budget statement from Chancellor Sunak on Wednesday ahead of next Thursday’s Bank of England meeting, for which the market is unwinding expectations for a rate hike to more balanced expectations for a move then or a wait until December after recent confusing headlines from a variety of BoE speakers – particularly the jolt last week after Governor Bailey hawkish comments. The September Short Sterling contract is some 16 basis points off the lows from las Monday, for example. Classically, fiscal austerity is currency negative and while Sunak is expected to both offer up plans that support some of the most disadvantaged in the UK on the rise in heating costs and for those last bits of the economy still directly affected by covid disruptions as well as longer term spending objectives linked to the climate and , but the more impactful part of the budget statement will be on the degree to which Sunak vows to put the UK back on track to fiscal sustainability with higher taxes and other measures, in part made necessary by the rising costs of servicing debt and as some fiscal outlays will automatically rise anyway as they are indexed to inflation.
Chart: GBPUSD
An interesting test for sterling through next Thursday’s Bank of England meeting after recent BoE comments have seen an incredibly aggressive ramping in anticipated rate hikes and in the wake of this week’s budget statement as discussed above. Cable has reversed back higher after the sequence below 1.3650, but has yet to take out the 200-day moving average a bit higher. A particularly hawkish budget statement from Sunak could keep sterling on its back foot, though there a quite a few support levels of note all the way back to at least 1.3575, while we also watch the meeting next for the degree to which the Bank of England supports the market’s assessment of the forward UK rate curve – all while risk sentiment remains an important coincident indicator that has been an important support – if not the chief support – of the comeback off the sub-1.3500 lows.