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 


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
The Circle 38

Contact Saxo

Select region


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.