FX Update: USD bounce-back this week if Powell lands reality check. FX Update: USD bounce-back this week if Powell lands reality check. FX Update: USD bounce-back this week if Powell lands reality check.

FX Update: USD bounce-back this week if Powell lands reality check.

John Hardy

Head of FX Strategy

Summary:  The Fed can’t be happy with the easiest financial conditions since before it began hiking rates in earnest last year as the market front-runs not only an imminent peak in its policy rate within a few months, but a roll-over to rate cuts by late this year. So Powell and company will do what they can to hammer home its “higher for longer” message. Will the market finally listen and what about the heavy load of data this week? Risks may skew towards a USD consolidation.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Fed likely set to do what it can to push back on complacent market on its policy path. And then there’s the data, which can help the US dollar in two different ways.

As we discussed on the Saxo Market Call podcast, the market itself has influenced the Fed’s likely message at this Wednesday’s FOMC meeting: the very complacency and powerful easing of financial conditions over the last several weeks are likely rubbing the Powell Fed the wrong way and raising the odds that they will deliver a more hawkish message to ensure that their “higher for longer” message gets the respect that has so far eluded it. What that looks like is not entirely clear, but at minimum the Fed will likely avoid signaling that it will soon pause its tightening cycle as the Bank of Canada did after last week’s rate hike. With financial conditions this easy, the Fed’s policy transmission is in doubt outside of the most obviously interest rate sensitive sectors, even if inflation has eased back as the Fed hoped it would.

And then there is the US data this week, with the ISM Manufacturing survey up Wednesday ahead of the Fed meeting and the more important, but suddenly erratic ISM Services up on Friday that will hopefully tell us whether the huge downdraft in the survey in December was a fluke or a sign of serious downshift in the services economy, one that the S&P Global PMI series has suggested for the last six months (but one that has somehow not resulted in any uptick in jobless claims, etc.). This cycle is highly unusual. Arguably, surprisingly bad data can be bad for sentiment and USD (and JPY supportive) if risk sentiment takes a hit on concerns for worse-than-soft-landing outcomes, while strong data might prove USD supportive if it sets off a new strong impulse higher in global yields.

The strongest trend going of late within G10 has been the AUDUSD, which is rather fitting, given the focus on the impending China “normalization” trade that has inspired a steep rally in metals and coal, key Australia exports, as well as on a hot Q4 CPI report from Australia last week that saw a big jump in RBA expectations, while the US dollar has been weak on complacency surrounding the economic cycle (benign soft landing priced) as well as the market pricing the Fed to halt its rate tightening cycle soon and cut rates starting later this year. Interesting to note China’s mainland markets returning today with a large gap opening higher that quickly yielded to an all-day slide. Could this be a signal that we have priced a lot from China’s purported return to growth and stimulus and may need some time to assess? As well, our base case outlined above is that the market is too complacent on the implications of both weak and strong US data, as well as the Fed possibly on the warpath this week against market’s expectations for its policy path. Plenty of room for AUDUSD to consolidate back below the pivotal 0.7000 level and even into 0.6900 without even beginning to threaten the up-trend here. A more significant reversal below that level and perhaps below the 200-day moving average toward 0.6800 would likely require a more significant set-back for global markets, whether due to mounting recession fears or a fresh run-up in Treasury yields that supports the greenback.

Source: Saxo Group

The euro caught a bid today after dipping toward 1.0850 on the release of a far hotter than expected preliminary Spanish CPI print for January, as headline inflation dropped far less than expected month-on-month (-0.3% at the headline and -0.5% for the HCPI vs. -1.9% expected) and year-on-year headline inflation was out at 5.8% for the HCPI vs. a 4.8% expected and 5.5% in December, a huge miss. Short EU rates picked up sharply on the news today, but the ECB may still be priced a bit too aggressively this week, at least relative to other central banks and relative to what the ECB can deliver in the way of guidance.

Table: FX Board of G10 and CNH trend evolution and strength.
Trends are very weak outside of the weaker USD and especially stronger AUD trends – looking for some possible consolidation in these trends this week. The Scandie weakness given hopes that the EU economic outlook is improving is remarkable.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
No strong new signals here after many key currencies remain rangebound – watching the trend status closely this week given key central bank meetings and data, however, particularly for EUR, GBP, JPY and USD.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1530 – US Jan. Dallas Fed Manufacturing Activity
  • 2330 – Japan Dec. Jobless Rate
  • 0030 – Australia Dec. Retail Sales
  • 0130 – China Jan. Manufacturing and Non-manufacturing Survey


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