FX Daily: Fed dispute delays dollar decline
USD: Fed dispute makes dollar sales more difficult
The dollar in general, although slightly, was stronger after last night’s FOMC statement and press conference. The statement was largely in line with expectations, but the press conference turned into something of an ‘interest rate protest’ from the Federal Reserve. Here, Fed Chair Jerome Powell appeared to be laying out a new script and stressed that a rate cut in December was not a “foregone conclusion.” This led to a 25bp cut in interest rates in December to 70% from around 100% previously. The Fed now thinks that a 70% probability is still too high. Knowing that policy rates are not on track towards the 3.00/3.25% area leaves investors paying for the short end of the US interest rate curve and taking about 10bp off the expected easing cycle. The bearish flattening of the curve was most pronounced against low-yielding currencies such as the Swiss franc and yen, while commodity FX was slightly more insulated due to improving trade relations between the US and China. A one-year delay in China’s rare earths export controls appears to be a major victory for global supply chains.
Interestingly, US equities remain relatively well bid, suggesting that AI companies’ earnings reports, not Fed easing, are the main driver of the S&P 500’s slight but impressive rise this year. Overnight, Meta, Alphabet, and MSFT delivered mixed results – although headline earnings appeared to do well.
Returning to the Fed, it seems that an interest rate cut in December is in the balance now. The central bank sounded more relaxed on inflation, but state-level jobless claims data told the Fed that the employment situation is not getting any worse. And with consumption and business investment performing well, there now appears to be a healthy internal debate about whether the neutral policy rate is closer to 4.00% rather than 3.00%. Powell described this as a very different view on the future direction of interest rate policy.
Last night’s Fed communication makes it difficult to sell the dollar at the moment. We really need to see some weak US jobs data to solidify the view of another 75bp of central bank easing until next summer. Otherwise, 25bp can easily be removed from the cycle.
Outside of today’s weekly jobless claims data, the ongoing shutdown means the US data calendar is quiet. Expect the dollar to remain well bid, especially against the yen, as the Bank of Japan appears to be in no rush to tighten its policy – apparently needing more data on wage negotiations and food inflation before raising interest rates again. 155 is the risk here. DXY looks like it could stay in the upper half of the 98-100 trading range for a while.
Chris Turner
EUR: Focus on Q3 GDP release
It could have been worse for EUR/USD. ING’s consensus and view on EUR/USD’s rise towards the 1.20 level until the end of the year depends heavily on the Fed’s dovish stance. That doesn’t mean we are too optimistic about the euro. Therefore, last night’s Fed meeting made the year-end 1.20 decision a little harder to achieve. Nonetheless, EUR/USD found some support below 1.1600 overnight, which suggests investors are much more balanced in terms of dollar positions than they were in April – something that Francesco Pesole has discussed this week.
Where does EUR/USD go from here? Today, we’ll look at third-quarter GDP data from the eurozone. Keep in mind that while the survey data is encouraging, the real data has been poor so far this summer. Good news was seen this morning with French GDP in the third quarter coming in at 0.5% quarter-on-quarter versus 0.2% as expected. But unless we get a big upside surprise to eurozone GDP – expected at 0.1% QoQ – it’s hard to see EUR/USD getting a big lift.
We also have a small matter at today’s European Central Bank meeting. However, we doubt President Christine Lagarde will feel the need to change the market price, which has only slightly supported another rate cut in the next nine months.
1.1640/50 appears to be the top of the short-term range, and EUR/USD currently looks more vulnerable to 1.1550, given the communication from the Fed last night. Downside risks could also emerge from today’s release of preliminary October CPIs from Germany, Spain and Belgium.
Chris Turner
GBP: Don’t chase the sterling sell-off
We had a few questions from journalists yesterday about the sterling sell-off and the fact that Gilt yields are falling. This does not seem to fit with the ‘Sell Britain’ theme ahead of November’s budget. We see sterling moving more from the Bank of England’s perspective. Here, investors expect UK Chancellor Rachel Reeves to stick to her fiscal rule and perhaps undertake greater fiscal tightening in a bid to rebuild budget space. This means the BoE must take decisive action by lowering interest rates early. We have seen a decent move in GBP swap rates this month as investors repriced the BoE’s terminal interest rate to 3.25% next summer.
However, the BoE’s cyclical readjustment may be enough for now – meaning it is a bit dangerous to chase sterling through major support in GBP/USD at 1.3140/50 or above the 0.8850/70 area in EUR/GBP. The BoE maintaining its hawkish rhetoric could actually see sterling reverse some of its losses at next week’s MPC meeting.
Chris Turner
CEE: GDP figures attest to greater differences across the region
Yesterday’s Fed ended the risk-on mood for CEE currencies, and EUR/USD’s decline suggests some downside in the EUR pair today as well. On the other hand, a spike in USD interest rates will push the CEE interest rate market up, which may reduce the impact of a strengthening US dollar. As we discussed yesterday, long positions make the Hungarian forint and, to some extent, the Polish zloty more exposed to global news, and it is in this sequence today that we see sensitivity to the sell-off following yesterday’s Fed meeting. However, we should also see a continuation of the trade story from US President Donald Trump’s visit to Asia, which could lead to a return of positive sentiment to the markets.
At the same time, Hungary and the Czech Republic will publish preliminary GDP figures for the third quarter this morning. In the Czech Republic, we saw an increase compared to market consensus, while in Hungary, we saw a decrease. Greater attention should be paid to the figures in Hungary, where there is a greater chance of exceeding expectations, and at the same time, this has been communicated by the Minister of National Economy, Marton Nagy. In an interview, he put the figure at around 0.5% year-on-year (ING forecast 0.6%), while the market was expecting 1.0% YoY. This will add to the negative sentiment coming from global news, and EUR/HUF could move higher towards the 390 level in our opinion.
On the other hand, Czech GDP figures can only support the currency and divert some global pressure. At the same time, the Czech National Bank’s blackout period begins today, and we will see at least one interview from the bank’s board. EUR/CZK should not move too far from 24.350.
Chris Turner
Source: ING
