Global Head of Macro Strategy
Summary: The FOMC reduced its quantitative tightening further while it raised the inflation outlook and lowered the outlook for growth. US yields fell in the wake of the decision and European rates fell as well, a combination that saw the euro lower and the yen higher.
The market decided this week that the massive German stimulus package was a sell-the-fact moment for the currency and a buy-the-fact moment for German bunds. I thought that the euro trade could continue to build some more upside before a larger consolidation set in, but the retrenchment in German yields and failure to make new highs in EURUSD is forcing the bulls into consolidation mode. The combination of consolidating European yields heading for consolidation and the FOMC triggering a move lower in long yields as well saw a head-snapping reversal in EURJPY – more on that below and how the market has to weigh the near term risks for Europe versus the longer term positive growth implications of the massive German fiscal package. Reading the Fed meeting is straightforward for US treasuries, much less so for the US dollar, which may be picking up a bid from a traditional safe-haven angle as the weak euro suggests that markets are playing less on the “policy divergence” trade. More on the FOMC and today’s three central bank meetings in Europe below.
Chart: EURJPY
The last extension in EURJPY to new highs didn’t look fair from a yield-spread perspective as German 10-year yields failed to post new highs even as the EURJPY rally extended to new local highs beyond 162.36. Now, with European yields dropping, a significant gap has opened up. Of course, US long yields and USDJPY traditional dominate the focus for JPY traders, but it felt like the dramatic EUR rally and rise in European yields had stolen all of the focus recently. EURJPY can continue to drop and may even post significant new lows on any combination of weak risk sentiment, long US yields continuing to drop toward 4.00% or lower on a souring growth outlook there, all while German yields remain merely stuck in a range to only slightly lower. The outlook for Europe is one of timing here after the initial rush of enthusiasm for what has unfolded and a huge reassessment of portfolio allocations. For the near term, the market may take a bit of time to weigh the stronger long term outlook for German and European growth, perhaps sensing that the fiscal expansion could be slow moving and not hit the economy in size until 2026 and beyond, while the near term threats of US tariffs could see the economy slightly weaker in the coming couple of quarters.
FOMC: shares in widening stagflationary fears.
The FOMC played dovish as the Fed upped both inflation and growth concerns in its economic projections even as it didn’t change the dot plot projections from December for 2025 through 2027. By itself, these aren’t suggestive of further easing, but the market perhaps thinking that the Fed will be ready to ease slightly more if the economy underperforms its now more negative projection of growth for both this year and next. Note as well that the Fed also nudged its projection of this year’s unemployment rate higher (to 4.4% from 4.3%). The latter is very telling – if there is any meaningful economic weakness, the unemployment rate will shoot up much higher than that and prompt Fed action. The core PCE level for this year was revised higher than even current levels (2.6%) to 2.8% from December’s 2.5%, even if the 2026 and 2027 inflation projections were left unchanged. One key kicker that sent US yields lower and USDJPY lower was the reduction of the quantitative tightening of US treasuries to only USD 5 billion per month as of April 1, down from USD 25 billion. The presser brought the usual message of maximum uncertainty, with a surprising mention of “transitory” in connection with tariffs that may once again embarrass down the road after it embarrassed the Fed so badly in 2021, when the inflation at the time was declared transitory before the Fed decided it wasn’t and went nuclear on rate tightening. Trump was quick to criticize the decision and said the Fed should be cutting. In reaction to the meeting, the US dollar initially sold off, but then has curiously rallied since (ex USDJPY), perhaps on the reversal of risk sentiment from positive to negative, perhaps on a resumption of fears on the impact of incoming tariffs on April 2, which Trump is now labeling “Liberation Day” for the US. The US dollar has done well since the decision against traditional pro-cyclical currencies like the commodity dollars – AUDUSD particularly ugly today after that weak employment report overnight – bringing forward the date of the second RBA cut.
The other central bank meets today
The other central bank meetings were relatively short on drama. Sweden’s Riksbank confirmed what the market already has priced, that the rate cutting cycle is over there. EURSEK has held quite well so far on the consolidation in the euro elsewhere, especially relative to its recent massive repricing lower.
The Swiss National Bank meeting today brought a bit more reaction, as the 25 basis point rate cut delivered today was not fully priced. This saw EURCHF jump from a sell-off overnight, a fairly weak performance for CHF with yields dropping in Europe and the euro consolidating elsewhere. The SNB, as expected, said it saw no more cuts from here. This keeps the bullish outlook in EURCHF alive if it can maintain above 0.9500-25, though it needs to refresh the upside momentum north of 0.9650 soon, otherwise it lapses into CHFJPY is an interesting JPY cross on the smart technical reversal.
The Bank of England meeting saw little volatility for sterling as Governor Bailey said the bank remains on a path of slowly reducing the rate as he bemoaned mounting economic uncertainty. Sterling got a modest boost as there was only one dovish dissenter rather than the expected two. GBPUSD has now been rejected at the 1.3000 level, a huge one psychologically and technically on many occasions in recent years. EURGBP has corrected lower in line with EURUSD and needs to find support soon to suggest the recent rally was something to build on. Next key level perhaps the 0.8350 round level support and then the 0.8320 area, which is the 61.8% retracement of the rally wave.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The Japanese yen has neutralized its recent softness, but has much to do if it wants to build a new uptrend. CAD and AUD remain in a race to the bottom, while Gold has built its momentum broadly once again over the last week.
Table: NEW FX Board Trend Scoreboard for individual pairs.
CHFJPY is reversing hard only a couple of days after our trend measure turned positive, while the AUDUSD rally never got going and the pair could be in danger of a new downtrend, though at this point a range break lower is needed below 0.6200.
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