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FX Update: FOMC managed modest hawkish surprise. BoE dovish.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US dollar was slightly weaker on balance in the wake of the FOMC meeting last night, perhaps due to the overall sense that the Fed is happy to more or less track what the market has already priced. Elsewhere, the BoE sounds very uncomfortable with where things are headed and downgraded its guidance, taking sterling sharply lower.


FX Trading focus: USD lower despite FOMC clearing the bar with hawkish surprise.

FOMC meeting surprises modestly hawkish, market was (mostly) ready for it. The Fed did manage to surprise the market with a more hawkish than expected combination of dot plot and economic data forecasts and an aggressive schedule for quantitative tightening (QT). The rate hike itself was 25 basis points as expected, with the St. Louis Fed’s Bullard a not-surprising dissenter. In the statement, the Fed suggest that balance sheet reduction, or QT, would begin “at a coming meeting” wording that sounded a bit aggressive and in the presser Fed Chair Powell clarified that this could mean as soon as the May 4 meeting, together with the guidance that balance sheet reduction would be carried out at a more aggressive pace than in the previous 2017-19 experience. The pace then was some 30B in assets per month. In the dot plot – the 2022 forecasts were raised to very slightly exceed what the market has already priced in for this year, with a bit more than the market has priced in for 2023. The median for the 2023 forecasts was 2.75%. Formerly, the Fed saw its hiking cycle as something that it would carry out gradually over the 2022-24 time frame, but the new forecast trajectory suggests the Fed now sees a steeper path of hikes this year that will end fairly quickly in 2023, with the assumption that inflation is coming down to the acceptable range by 2024 (new forecasts for PCE core for 2022-24 are 4.1, 2.6 and 2.3, up from 2.7, 2.3 and 2.1 in the December forecasts). More or less full employment is forecast through 2024 and growth estimates for this year were taken down sharply to 2.8% from 4.0% (still looks too optimistic) and left unchanged at 2.2% and 2.0% for 2023 and 2024, respectively.

In reaction, the market managed to avoid a sell-off despite a fresh modest jump in US treasury yields all along the curve and further flattening of the yield curve. One might argue that with no real un-anchoring of the longer-term Fed forecasts or sense that the Fed is panicking (as it moved 25 and kept guidance mostly in line with what market is predicting) means that the market may feel that it has more or less priced “peak Fed” for now. I would argue that risk sentiment managing to rally/squeeze has more to do with the reaction to this meeting until proven otherwise. Let’s see how we close the week: a close above 1.1100 in EURUSD and above 0.7350 in AUDUSD tomorrow, for example, would be a start.

Quick read on BoE: dovish! The Bank of England announcement was out shortly before this was posted and looks dovish:  they hiked 25 bps, but there was one dovish dissenter (Cunliffe) and despite inflation set to climb to "around 8%" in Q2 and even higher later, inflation further out is set to fall back "materially". This sentence in the new statement underlines the strong concerns the MPC is feeling: “Developments since the February Report are likely to accentuate both the peak in inflation and the adverse impact on activity by intensifying the squeeze on household incomes". The Bank raised its concerned about the trajectory of employment and economic growth and makes it clear that the drivers of inflation are not something its monetary policy can address. On further tightening, the statement says “some further modest tightening in monetary policy may be appropriate in the coming months". That is a downgrade from “likely to be appropriate” in the early February report. I like EURGBP higher.

Chart: AUDUSD
AUDUSD has retraced beyond most of the key Fibonacci retracement levels in today’s trade, buoyed by the USD weakness in the wake of the FOMC meeting, by a strong Australia employment report overnight, and by a massive rush higher in Chinese markets on a signal of support for the economy and markets and the property sector from Chinese leadership this week. A close above 0.7350 for the week would help the technical situation, but a real help on the fundamental side would be an RBA that gets that signals a tighter stance rather than out-doving just about every other central bank, and key commodities prices looking back at cycle highs again. The coming few sessions are pivotal here.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
JPY weakness really sticking out. See yesterday’s update for comments on BoJ policy (meeting up tonight!)– wondering if we run into a major barrier for further JPY weakness once the end of financial year in Japan arrives at the end of this month? Sterling is stumbling broadly and for good reason after today’s BoE meeting.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The recent EURGBP flip to positive gets a big boost from today’s BoE meeting. Elsewhere, watching AUDUSD and USDCAD closely in next couple of sessions to sese if flip to negative for the US dollar holds – similar for USDNOK.

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1230 – Canada Feb. Home Price Index
  • 1230 – US Feb. Housing Starts and Building Permits
  • 1230 – US Weekly Initial Jobless Claims
  • 1245 – ECB's Schnabel to speak
  • 1315 – US Feb. Industrial Production
  • 1430 – ECB's Visco to speak
  • 2330 – Japan Feb. National CPI
  • Overnight tonight: Bank of Japan meeting
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