FX Update: Fed faces impossible communication task today. FX Update: Fed faces impossible communication task today. FX Update: Fed faces impossible communication task today.

FX Update: Fed faces impossible communication task today.

Forex
John Hardy

Head of FX Strategy

Summary:  Not only does the Powell Fed face the impossible task of deciding whether to communicate measured caution with a rate hike or more significant caution with no rate hike today, the guidance task for what it will do next is even more challenging. To boot, the market reaction function to today’s FOMC decision and guidance may prove far from straightforward. Elsewhere, hot UK CPI this morning has market pricing near certainty of BoE hike tomorrow.


Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: Fed faces impossible task of forward guidance today. Hot UK CPI has sterling in fresh rise ahead of BoE tomorrow.
With markets visible volatility calming considerably over the last couple of sessions, the market is now happier to price the Fed to hike by 25 basis points at today’s FOMC meeting with quite high odds (+21 bps priced this morning in Europe), a move that would take the rate to 4.75-5.00%, with marginal odds of another hike in the following meeting or two, followed by the beginning of an easing campaign by Q4. The as-of-this-writing caveat is more than ever, as Fed “expectations” are to a large degree a function of the US treasury market getting kicked all over the place as investors and traders sought shelter from the banking turmoil fallout over the last couple of weeks, especially at the short end of the treasury curve.

So what does the Fed do? Even former NY Fed chief Bill Dudley can’t come up with a good course of actions in comments he made in a Bloomberg opinion piece, as he rightly points out the risk of the market getting spooked that the Fed knows something is terribly amiss if it fails to hike on the one hand, but on the other, risking aggravating the policy mistake of having taken rates too high too fast if the “banking malaise” worsens. Just as importantly, what will be the market reaction function – both in the immediate wake of the decision and in the days to come? The ECB meeting last week showed how quickly the market can change its mind on central bank action here. In any case, as I note in the EURUSD chart discussion below, I will be watching for sentiment swings across many indicators more than I will consider the implications for yield spreads based on Fed guidance.

And the underlying challenge for banks as I have discussed in recent reports could be less about depositors fleeing on concerns about a given bank’s stability and more about demanding higher returns on their savings and parking more funds outside banks, for example in treasuries or otherwise. Today’s Saxo Market Call podcast notes the general drop in bank deposits in US Commercial Banks that is completely without precedent. The traditional central bank toolbox doesn’t address that.

Chart: EURUSD
The EURUSD has rebounded as a function of financial market stability returning and how it behaves in the wake of tonight’s FOMC meeting will likely correlate closely to how risk sentiment treats the Fed’s decision and guidance rather than any implication of what the Fed is saying on rate guidance. If we look at the current 2-year yield spread relative to where we were on March 8, the day before the banking turmoil was unleashed on the markets, we are some 35 basis points in favour of the Euro, where its hiking expectations have been marked down less than the Fed’s expectations. While the relative shift in favour of the euro was far greater at times during the market turmoil, the turmoil itself makes it difficult for the market to do anything but head for safety, which during the recent bound meant the USD and even more so, the Japanese yen. Watching 1.0800-50 as the final resistance ahead of 1.1000 in the EURUSD chart, and for a bearish reversal scenario (close well south of 1.0700) if the USD serves as safe haven as more market turmoil ensues after FOMC today.

Source: Saxo Group

Elsewhere, this morning’s UK February CPI release certainly raised eyebrows with across-the-board surprises on the hot side for inflation – with the headline jumping to 1.1% MoM and 10.4% YoY vs. 0.6%/9.9% expected and 10.1% in January, while the core was a blistering 6.2% vs. 5.7% expected and 5.8% in January. This has the market pricing nearly 100% odds of a BoE hike tomorrow, just a meeting after the BoE was clearly looking for excuses to pause. Remember Governor Bailey’s comment on March 1 that it was possible that the BoE has come to the end of its hiking cycle and its very aggressive disinflation forecast from the February meeting: sub 4% by the end of this year and 1% for headline CPI in two years! Sterling is all over the shop, sharply down yesterday versus especially the euro, but fighting back there today and posting local highs against the US dollar.

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar is tilting lower again – but probably need the close of trading Friday to have a “confirmation” signal in place in either direction for the greenback, given the uncertainties around the reaction function to tonight’s FOMC meeting. A novelty to see sterling at the top of the G10 trending list after today’s hot UK CPI (and yesterday’s weakness).

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Almost all USD pairs have now turned lower for the greenback – bracing for the FOMC meeting input. For sterling, almost all pairs in the plus column for sterling ahead of BoE tomorrow – an embarrassing one for the bank on today’s hot UK inflation print.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1730 – Canada Bank of Canada to release “summary of deliberations”
  • 1800 – US FOMC announcement
  • 1830 – US Fed Chair Powell Press Conference
  • 2130 – Brazil Selic Rate Announcement
  • 0015 – New Zealand RBNZ Chief Economist to speak on inflation
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.