Today's Saxo Market Call podcast
FX Trading focus:
- FOMC was a damp squib and the ECB meeting should have been a non-event as well, but is read as more dovish than expected at first blush.
- Strong US data an interesting challenge to the FOMC reaction
- Huge hedging in JPY upside risks ahead of BoJ meeting – ironically can make volatility risks run both ways.
The ECB hiked rates as expected and kept a data-dependent message on the odds for a September meeting additional hike. This was no major surprise as several ECB officials have been out and pulling away from pre-committing to any further tightening. The news this week that Q2 bank lending was cratering at a record rate is sending chills up and down the bank’s spine, and we have to remember that the Eurozone is a a more banking-intensive economy. Also, unlike the US, there was less of a cash splash to boost personal income and savings during the pandemic and less of a refinancing boom that keeps so many in the US still operating at record low interest rates from pandemic era loans. Unlike the previous statement, this new statement from the ECB highlights that its policy moves are feeding through: “financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.” This may prove the last rate hike for the cycle, but at minimum should mean the euro’s days as a broadly strong performer are over. It is a bit surprising that the market found the decision as surprising as it did (although some of that was the USD move weaker in the wake of the FOMC meeting that was simply backed out), but now we watch whether the damage to the euro widens out to both EURUSD and EURJPY (the latter on the Bank of Japan risks as noted below). For EURUSD, a close below 1.1000 for the week suggests the highs are in for now.
Just after the ECB meeting, we see strong US data (lowest weekly jobless claims number since February and strong GDP print, although that was on a very low GDP price rnumber of 2.2% annualized vs. 3.0% expected and 4.1% in Q1) complicating the market’s reaction to the FOMC meeting. The FOMC meeting itself was a non-event with an unchanged statement on balance and Fed Chair Powell determined not to say anything except that the Fed remains data dependent. The equity market can hear no evil, however, as stocks continue to soar – that looks a bit out of place in treasury yields heat up again on the incoming data.
The Bank of Japan could yet have influence on the direction in the US dollar if there is a strong reaction off the back of the Bank of Japan meeting tonight, but taking EURUSD by itself, the key here is the 1.1000 area that bears need to retake into early next week to suggest that a top is in for now.