FX Update: FOMC kneejerk fading fast. FX Update: FOMC kneejerk fading fast. FX Update: FOMC kneejerk fading fast.

FX Update: FOMC kneejerk fading fast.

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The kneejerk to the FOMC meeting was a weaker US dollar and rally in risk sentiment, as the market felt the FOMC delivered little relative to expectations, though the kneejerk has faded sharply in Europe today. Powell made it clear that the Fed does not want to provide explicit forward guidance on rate moves from here and will yielding to incoming data, which will aggravate volatility around key data releases.


FX Trading focus: FOMC kneejerk fading fast

The FOMC meeting was an interesting test of market psychology as the statement and Fed Chair Powell refused to deliver much, leaving the market to its own devices – having to decide whether its own expectations on where the economy will be by late this year and into next year are correct and whether the incoming data in that period will see the Fed able to slow its rate tightening and then even begin to cut already starting perhaps by mid-year next year. The market puffed out its chest with confidence late yesterday that Fed Chair Powell had not pushed back strongly enough on the market forecast, but seems to be second-guessing the knee-jerk reaction by lunch-time in Europe today.

My initial reaction to the FOMC meeting in an internal memo just after the conclusion of the presser last night was as follows:

The FOMC statement provided very little to go on – really only the addition at the beginning of the statement that “Recent indicators of spending and production have softened. Nonetheless.. [repeats strong labor market views, etc.]”

In the Q&A, Fed Chair Powell dodged every attempt to make a point that could be considered solid forward guidance – he even specifically stated that the Fed won’t issue any “clear guidance” on future rate moves and that the June FOMC rate forecasts are the only thing on offer for a likely path of rates (even after WSJ’s Timiraos specifically poked Powell to answer whether he thought it was fair that the market is pricing the Fed to cut rates next year after a peak by the end of this year.) For the September FOMC meeting, Powell said that further “unusually large” rate increases (read: 75 bps vs. 50 bps) will depend on incoming data, with two CPI prints before that September 21 meeting. Market currently priced at +58 bps.

The general lay of the land is this: Fed sees some evidence of heat coming out of the economy, but refuses to provide new guidance and will be ruled by the data – this will mean extreme sensitivity to US data releases from here (the stronger the US economy and/or inflation the worse for the market)

The initial market reaction is that this has sparked aggressive risk-on as it solidifies the market confidence in its own forecast: that inflation is set to recede and growth slow, allowing the Fed to peak out with the Fed funds are about 100 basis points higher still, but rolling over to cuts on a weak economy/recession next year.

We consider this path highly unlikely, and the significant easing of credit spreads and fall in yields all along the curve since mid-June (timing of prior FOMC meeting) will likely mean risks of higher inflationary readings from here. The Fed is asleep at the wheel….and we don’t trust the initial market reaction, even if it could extend in the very short term (if at all beyond today’s session – big earnings could be negative distraction as market essentially got what it wanted – permission to indulge in its own forecast of how the economy will shape up, with Fed not leading, but reacting.

We have to remember as well, that Fed will mechanically begin reducing liquidity via QT as it moves toward peak pace of $95 billion of balance sheet reduction per month by September (maximum achieved so far only $35 billion reduction over last four weeks) and that August is traditionally a poor month for liquidity….

The action in Europe by late this morning is already casting a shadow over the kneejerk reaction to the FOMC meeting, for EURUSD in particular, with the broader USD picture quite mixed since yesterday. Given the dismal reality facing the EU heading into the fall, I have a hard time supporting the euro in any currency pairing. Note EURNOK slamming lower as it should, given Norway’s total insulation from the energy woes (I do wonder about how Norway deals with the PR long term of the kinds of incredible profits it is reaping from this situation). I can’t see why EURNOK shouldn’t fall to 9.50 and even 9.00 eventually on a miserable winter situation for power/gas prices in Europe in coming months. EURJPY looks heavy, too, which it should be, given the tremendous tightening of yield spreads and the ugly overhang of economic and semi-existential (Italian populist uprising redux at coming election) angst. On the latter, noting the 136.87 area. Elsewhere, the USD reaction has not faded as much – still need to give ourselves through tomorrow’s close (post-PCE inflation data) for a sense on whether the market got this FOMC reaction “right” for a larger move.

Chart: EURJPY
EURJPY is nearing critical technical levels as the euro is the sick currency of the world at the moment, stealing the JPY’s recent thunder as the easing in bond yields globally, and especially in Europe, has the negative attention slowly pivoting away from Japan (note tonight sees July Tokyo CPI out of Japan). A drop through the 136.87 level could quickly open up for a test toward the 133.00 area noted and last test in May and even 130.00 eventually if the news flow doesn’t improve for Europe.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Euro weakness deepening here, while we still hold our breath a bit on USD direction until the Friday close. NOK leads the pack for good reason as oil and gas prices are both resurgent, while AUD is a strong runner-up on that gas prices, but also as industrial metals are a bit resurgent and coking coal is on a tear.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURNOK is dropping like a stone and EURSEK is mulling the 200-day moving average break (recently, I have argued that SEK may break its slavish correlation to simple risk sentiment). The USDJPY has flipped negative as of the current print – let’s see if that move sticks through the weekly close. EURGBP is powering lower, but I am reluctant to get on board the recent flip of GBPUSD to a rising trend.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Germany Jul. Flash CPI
  • 1230 – US Q2 GDP Estimate
  • 1230 – US Initial Weekly Jobless Claims and Continuing Claims
  • 1300 – ECB's Visco to speak

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/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 Markets 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 Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

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 such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

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

The information or the products and services referred to on this website 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 intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.