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FX Update: USD drops on Powell’s weak push-back. Sell the ECB fact? FX Update: USD drops on Powell’s weak push-back. Sell the ECB fact? FX Update: USD drops on Powell’s weak push-back. Sell the ECB fact?

FX Update: USD drops on Powell’s weak push-back. Sell the ECB fact?

John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  The USD craters to new lows as Powell failed to make much of a stand against market expectations for the course of Fed policy from here, which remain far below the Fed’s own forecasts. Cue today’s ECB meeting, where the market remains a believer in considerable further tightening and the Bank of England, where the market is rushing to price a dovish deceleration. And then there’s the rash of US macro data up tomorrow.

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FX Trading focus: Powell’s push-back surprisingly light, will be easy for ECB to disappoint.

The FOMC: this was a much weaker performance than markets were fearing, at least in terms of concern that Powell would try to administer a sharp rebuke to the market’s expectations of a Fed easing cycle set to kick off later this year or looking for elevated Fed concerns on the scale at which financial conditions have eased. The statement did retain the language discuss further increases (note: plural) in the policy rate, but the market still only prices one more 25 basis point hike from the Fed before a pause sets in, will fully 50 basis points of cuts priced in before year-end and another nearly 150 basis points for next year. For the Fed to deliver this, we’ll probably need for the US economy to be in dire straits – not the soft landing that asset markets are pricing. EURUSD took a look above 1.1000 and the USD broker lower elsewhere, but the combination of easing forward rates and complacent risk is getting extremely stretched. If rates are to fall farther from here, it will be on fears of a proper recession rather than a benign slowdown. Meanwhile, the US labor market remains extremely tight – let’s have a look at today’s weekly claims and tomorrow’s payrolls and earnings data. Still, in the Powell press conference, the Fed Chair didn’t seem in a fighting mood against market expectations and delivered comments like “we can now say for the first time that the disinflationary process has started.”

Getting to the other side of the FOMC meeting allows us to focus more closely on the ECB and Bank of England meeting up today. The market clearly pricing some risk of a more dovish message from the Bank of England today as sterling is even underperforming a weak US dollar and has broken lower versus the Euro. And I think that is what we are more likely to receive from Governor Bailey and company today. Watch for an indication of wanting to pause soon as a confirmation, as well as indications in the newest inflation forecast. Although the BoE is already excessively optimistic in having said in November that the CPI would fall below 2% within two years at the November BoE meeting. It repeated the language around further rate increases at the December meeting, so it will be important to watch whether the statement alters the guidance language of “further increases…may be required for a sustainable return of inflation to target” to something a bit looser (such as perhaps whether it will soon be time to consider a pause, etc..similar to the Bank of Canadas’ deceleration to a pause.) The impact on housing in the UK of higher rates will be enormous as fixed rate mortgages with shorter terms roll into this new interest rate environment. The market is priced for about 50 bps of further tightening beyond today’s 50 basis point hike.

Regarding the ECB, the market is still looking for at least 100 basis points of further tightening beyond today’s 50 basis point hike, and the reaction to the FOMC yesterday has taken the 2-year, 2-year EU-US spread to within a few basis points of parity – extremely hard for me to see the ECB taking that spread positive – I sense risk of a sell-the-fact on the ECB, with EURUSD only able to scratch a bit higher still if driven by generalized complacency and risk-on, not the relative policy outlook. Let’s see.

EURUSD spiked higher and even took out the 1.1000 level in late trading yesterday, dipping back below here in the hours ahead of the ECB meeting. The broad strength in the euro does feel a bit like a “sell the fact” setup, given that ECB forward tightening expectations are the most aggressive among G10 peers. It will be easy for the ECB to fail to clear the bar of expectations. For now, the technical key is whether this last aggressive extension higher holds on what has been a set of remarkably shallow consolidations in the run-up from the 0.9750 area in early November. Helmets on!

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Let’s see if yesterday’s extension of the USD weakness was a red herring or if the move can stick on the other side of the important US data up tomorrow. Euro strength is also pronounced here. Given forward ECB expectations, the ECB will have to clear high expectations today to see that strength persist. The ever-suffering Scandies are also suffering at the hands of the relative hawkishness of the ECB – would a “sell the fact” on the euro be felt there?

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Sterling weakness broadening out aggressively here as the market smells a dovish shift from the BoE today. The EURUSD up-trend in place for a remarkable 64 trading days, only beaten by spot gold.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1200 – UK Bank of England Rate Announcement
  • 1230 – UK Bank of England Governor Bailey press conference
  • 1230 – US Jan. Challenger Job Cuts
  • 1315 – ECB Rate Announcement
  • 1330 – Q4 Unit Labor Costs / Nonfarm Productivity
  • 1330 – Czech National Bank Rate Announcement
  • 1330 – US Weekly Initial Jobless Claims
  • 1345 – ECB President Lagarde Press Conference
  • 1500 – US Dec. Factory Orders
  • 1530 – EIA's Weekly Natural Gas Storage Change
  • 1730 – Swiss National Bank’s Thomas Jordan to speak
  • 1830 – ECB President Lagarde to speak
  • 2100 – New Zealand Jan. ANZ Consumer Confidence
  • 0145 – China Jan. Caixin Services PMI


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