FX FX FX

FX Update: FOMC reaction erased. SNB goes big, BoE goes small. BoJ?

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market indulged in a relief rally and USD consolidation in the wake of the FOMC meeting last night as US yields edged lower, but the reaction has been entirely erased this morning, in part after the Swiss National Bank decided to go large with a 50 basis point lift-off hike and as the market eyes the Bank of Japan tonight nervously for a sense that the whole world is now tightening. JPY volatility tonight is inevitable no matter what path Kuroda and company choose.


FX Trading focus: FOMC relief proves brief, SNB surprise with big hike, BoE, BoJ on tap

The Fed delivered the 75 basis points expected and approximately adjusted its dot plot policy forecasts to jibe with the markets’ pricing of forward expectations, so no huge surprise there. A few interesting other developments worth noting: the new monetary policy statement removed the sentence: “With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong” and added a different sentence at the end of the same paragraph: “The Committee is strongly committed to returning inflation to its 2 percent objective.”. Note the dropping of the reference to the labor market and instead, the singular focus on inflation! This was confirmed in the new set of Staff Economic Projections, which tinkered only slightly with the inflation forecasts (no change to 2024 PCE core forecast of 2.3% – that is the main takeaway there) but heavily adjusted the real GDP forecasts for this year and next down to 1.7% for both years from 2.8/2.2 previously, while the unemployment rate is now forecast to rise for the entire forecast horizon – slightly to 3.7% and all the way to 4.1% by end of 2024. The message is that the Fed is willing to hike until the US economy is in recession. In the Chair Powell press conference, the impression was strongly that the Fed has no idea what it will do next, although still smoking hopium as Powell made a weak point that the next hike could be 50 basis points or 75 bps, depending on the data, as the Fed feels confident that as the next hike(s) are taking the Fed into the mythological “neutral rate” zone toward 2.5%, that outcomes will finally begin to suggest the tightening is gaining traction on inflation. That the market reacted much to this is a difficult to fathom, given the complete lack of Fed ability to forecast anything and the embarrassment of the guidance from May going up in smoke (the pushback against 75 bps hikes). Powell also prominently highlighted the inflation expectations surveys as a factor in driving the 75 basis point move.

Chart: USDJPY
USDJPY is under pressure after the SNB delivered a large hike today ( more below), which leaves the Bank of Japan looking ever more isolated in its continuation of QE via YCC and essentially losing control of its balance sheet as long as it insists on maintaining the 0.25% cap on 10-year JGB’s. Are Kuroda and company ready to simply abandon ship or do we get some kind of fraught, incrementalist approach, for example a slow ratcheting of the cap to higher levels? All possible choices will bring JPY volatility overnight, but the maximum volatility scenario is obviously to simply lift the cap on the longer yields or even to bring it forward on the yield curve, to, for example, 3 years. The latter would be seen as a move to eventually eliminate YCC altogether. USDJPY could suddenly trade back toward 125.00 on a complete walkaway a la the SNB abandoning the EURCHF floor in early 2015. Could such a move also point toward the beginning of the end of broad USD strength as the BoJ finally shows us a path toward normalcy? High inflation in Japan has become a political and financial stress liability with rapidly mounting costs – the sooner the BoJ abandons ship, the better, though at this point, the scale of adjustment will be tremendous should the bank simply “let go”.

Source: Saxo Group

An SNB delivered a shocker today as the bank moved to hike rates 50 basis points, ahead of ECB lift-off and at twice the size of ECB’s forecasted July hike. The noise level on an SNB move was rising today, but the market reaction speaks for itself as EURCHF was marked down about 2% on the announcement. With this seeming divorce from the assumption that the SNB would always prove the last to move to avoid currency strength, with the ECB looking hapless with the fragmentation issue and set for a seeming slow pace of lift-off, the risk rises of a EURCHF test well below parity.

The Bank of England is out just before this update goes live: the bank hiked the policy rate 25 basis points to 1.25% as most expected, with 3 members in hawkish dissent, also as expected. This seemed to the bank to be the appropriate policy rate even as GBPUSD has been attacking decadal support at 1.2000 and the Fed just hiked 75 basis points and the CPI is set to rise to 11% at its peak before the end of this year, according to the bank’s latest forecasts…. This looks like an excuse to take GBPUSD toward 1.1500 if global risk deleveraging continues on another leg lower.

Table: FX Board of G10 and CNH trend evolution and strength.
All eyes on JPY tonight over BoJ, and wondering if GBP is set to take up the “lead” position in the race to the bottom after today’s BoE meeting – watching 1.2000 in GBPUSD. NOK weakness is getting excessive in the crosses as the market prices Norges bank much higher, but EURNOK at key levels.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Again, watching the JPY crosses most closely tonight – more of these are threatening a negative flip on any further follow-through in the JPY higher here: note NZDJPY, GBPJPY, SEKJPY all looking to join NOKJPY in the negative column today on a lower close and BoJ confirmation…. Also note EURCHF jolting lower and already triggering a negative flip if it generally lower.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US May Housing Starts and Building Permits
  • 1230 – Philadelphia Fed Business Survey
  • 1430 – EIA's Weekly Natural Gas Stock Report
Disclaimer

The Saxo Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.