Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: FOMC surprises may be tough to come by tonight.
John J. Hardy
Chief Macro Strategist
Summary: Fed Chair Powell will have a hard time surprising on the hawkish side as it has little reason to do so, given the improving inflation outlook. But neither will it want to offer any impression of dovishness, as markets are already aggressively pricing inflation to normalize quickly and for the Fed to begin cutting rates. Any market pivot today, therefore, will likely be down to flows based on a different agenda once the FOMC event risk is out of the way, not because of any new message in tonight’s FOMC meeting or Powell presser.
Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: FOMC may not move the needle – more USD downside ahead?
The Fed will deliver a 50-basis point rate hike today and will likely do little to pre-commit to coming meetings outside of vague indications of staying on course with some measure of further tightening to ensure that inflation falls. It doesn’t need to surprise on the hawkish side (beyond chest-thumping to implicitly pushback against the market’s aggressive easing expectations out the curve) as recent inflation data has come down more quickly than expected. At the same time, the Fed won’t want to surprise on any guidance on the dovish side as markets have eased financial conditions so aggressively and is already pricing too much Fed easing in the Fed’s own view. On the latter, the explicit pushback would be a (likely) median Fed funds projection in today’s “dot plot” that is near 5.00% at a time when the market has already downshifted the December 2023 FOMC policy rate to 4.32%. I see no reason for the Fed to shift any of its economic projections save perhaps for GDP, especially not in the direction that makes it look too optimistic (better to revise later).
So if the Fed is determined to avoid surprising the market, will the market trade sideways? Hardly likely and the markets and US dollar could yet move sharply in the wake of today’s meeting, mostly simply because the event risk is “out of the way” rather than because it delivers noteworthy surprises. If there is more fuel in the speculative rally of late that extends into year-end as it did last year, this FOMC meeting is unlikely to stand in the way. On the other hand, if long yields pull back higher for reasons entirely unrelated to the FOMC (anticipation of expanding treasury issuance and early positioning for a move higher in long yields/yield steepening next year as the improved liquidity picture of recent weeks (again, driven in large part into year-end by the Treasury drawing down its account at the Fed, a key part of financial conditions easing recently) this could spook risk sentiment and bring a bid back into the greenback.
Chart: EURUSD
Watching EURUSD and other USD pairs over tonight’s FOMC meeting and Chair Powell press conference, with low hopes that either delivers significant surprises. But as noted above, the US dollar could yet move sharply on tonight’s meeting, simply as event risks can serve as a hurdle for market participants putting capital to work on new trades – wait for the event risk and then trade on the original intention as long as the event risk brings nothing new. Either way, the technical market bears watching, with any bearish hopes for EURUSD here requiring a solid rejection of yesterday’s CPI-inspired rally and taking the price action back south of 1.0550. To the upside, the next area of interest is perhaps into the pivot highs just below 1.0800 from the June time frame.
Table: FX Board of G10 and CNH trend evolution and strength.
Watching in coming days/week for a pivot in the incredible run-ups in trades like NZD vs. CAD, GBP vs. CAD, EUR vs. AUD, etc…
Table: FX Board Trend Scoreboard for individual pairs.
Between the FOMC meeting tonight and the calendar roll a good time to watch for shifting themes. For now, USD bears in control – note USDJPY teasing the 200-day moving average again as we watch US yields after tonight’s FOMC meeting and over incoming data.
Upcoming Economic Calendar Highlights
- 1330 – Canada Oct. Manufacturing Sales
- 1900 – US FOMC Meeting
- 1930 – US Fed Chair Powell Press Conference
- 2145 – New Zealand Q3 GDP
- 0030 – Australia Nov. Employment Change / Unemployment Rate
- 0120 – China Rate Decision
- 0200 – China Nov. Retail Sales
- 0200 – China Nov. Industrial Production
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