dollar strength

Federal Reserve to downplay chances of imminent action while holding rates steady

The dovish shift in Fed forecasts in December – with three rate cuts pencilled in for 2024 – incentivised the market to push even more aggressively in pricing cuts. However, they appear to have gone too far too fast for the Fed’s liking, even though inflation is almost back to target.

 

Expect more pushback against a March rate cut

The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% next Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening – allowing $60bn of maturing Treasuries and $35bn of agency mortgage backed securities to run off its balance sheet each month. 

At the December Federal Open Market Committee meeting there was undoubtedly a dovish shift. We got an acknowledgement that growth "has slowed from its strong pace in the third quarter" plus a recognition that "inflation has eased over th

Fed Divisions and Inflation Concerns Shape Rate Hike Expectations

Navigating FX Markets: Late Cycle Dollar Strength Meets Carry Trade Amid Central Bank Battles and Volatility Decline

ING Economics ING Economics 09.06.2023 08:28
FX Daily: Late cycle dollar strength meets the carry trade We see two key themes driving FX markets near term. The first is central banks continuing to battle inflation, yield curves staying inverted, and the dollar continuing to hold gains. The second is cross-market volatility continuing to sink - generating greater interest in the carry trade. Expect these trends to hold into Fed, ECB and BoJ meetings next week.   USD: Late cycle dollar strength continues Yesterday's surprise rate hike by the Bank of Canada (BoC) triggered quite a clean reaction in FX markets. Of course, the Canadian dollar rallied on the view that the BoC had unfinished business when it came to tightening. But the broader reaction was for short-dated yields to rise around the world, for yield curves to invert further, and for the dollar to strengthen. USD/JPY rose about 0.8% after the BoC hiked. The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too.   This endurance of this late cycle dollar strength is therefore the key story for this summer. For the near term, it looks like the dollar can hold the majority of its recent gains into next Wednesday's FOMC meeting - though the release of the US May CPI next Tuesday will be a big market driver too. Our bigger picture call remains that the dollar will embark on a cyclical bear trend in 2H23 - probably starting in 3Q - though the risk is that this gets delayed.   This brings us to our second key observation which is that declining levels of cross-market volatility continue to favour the FX carry trade. Somewhat amazingly the VIX index - implied volatility for the S&P 500 equity index - has fallen below not just the 22 February pre-invasion levels but also below the March 2020 pre-pandemic levels.   As is the case with low rates and FX volatility, presumably investors believe that policy rates will not be moving too much this year - perhaps a little higher and then a little lower. Lower volatility levels are favouring the carry trade which in the EM world favours the Mexican peso and the Hungarian forint and in the G10 space - as Francesco Pesole points out - favours the Canadian dollar. An investor selling USD/MXN six months forward at the start of the year would have made close to 16% by now.   Expect these core trends to continue for the near term. The data calendar is light today and we suspect a slight pick-up in initial claims will not be enough to move the needle on the dollar. Expect DXY to linger around 104.
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FX Daily: Riksbank's Hike and Dollar Strength Amid Inflation Concerns

ING Economics ING Economics 29.06.2023 09:37
FX Daily: Riksbank needs to show the krona some love The central message coming from this week's Sintra conference is that economies are holding up better than expected, the decline in inflation has been frustratingly slow and more tightening needs to be done. Expect the dollar to stay bid ahead of what should be another high US core inflation print tomorrow. Elsewhere, the Riksbank is expected to hike 25bp.   USD: No reason to fight dollar strength this week Central bank communication at this week's Sintra conference in Portugal has stayed pretty hawkish. The core message seems to be that low unemployment rates have allowed economies to withstand large tightening cycles reasonably well, meaning that inflation has not fallen as much as expected. Expectations for the duration and terminal rates for tightening cycles are being revised higher. This is most credibly being done in the US, where the economy appears to be outperforming. This is allowing the dollar to stay quite bid - especially against those currencies without much/any interest rate difference such as the Japanese yen and the Chinese renminbi. On the latter, policymakers are gently trying to fight the steady move higher in USD/CNY by setting lower fixings. However, they may be forced to cut the required reserve on FX deposits as they did last September if they want to send a stronger message of displeasure over renminbi depreciation. And as we have seen over the years, a steady uptrend in USD/CNY is not conducive to an overall bear trend in the dollar. Back to the Fed. If central banks are increasingly data-dependent, what's next in store for the Fed? The most important data point of the week will be tomorrow's release of the core PCE deflator for May expected at 0.3/0.4% month-on-month. Presumably, investors will be a little long dollars going into that release. Before that, however, we today see the weekly initial jobless claims figures. These have recently settled at higher levels. Any big upside surprise here could knock the dollar intra-day on the view that tighter policy is finally easing up labour supply - a key shoe to drop in the fight against inflation.  DXY looks biased to 103.30/35 and possibly 103.65 - as long as initial claims do not spike higher today.
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Analyzing Monday's Trades: GBP/USD on 30M Chart

InstaForex Analysis InstaForex Analysis 08.08.2023 12:09
Analyzing Monday's trades: GBP/USD on 30M chart     The GBP/USD pair tried to extend its upward movement on Monday, but this was in the absence of influential economic releases so it failed. In addition to that, the US reports from Friday were not weak enough for the dollar to fall further on Monday. Sterling does not have any reason to rise, and the USD does not have any reason to fall either. If it starts a corrective movement, it should be weak and slow. If the pound surges, it may indicate the resumption of the global uptrend, which, from our perspective, is completely illogical. Therefore, we are expecting a correction, followed by a decline. This week, there will be very few important events. The only noteworthy ones are the UK's GDP report for the second quarter and the US inflation report.   GBP/USD on 5M chart   On Monday, several trading signals were formed on the 5-minute chart. The break below the level of 1.2748 occurred overnight, but traders could have opened a short position once the European session started, as the price had not moved far from the formation point by that time. The pound fell by about 20 pips, so the Stop Loss should have been set to breakeven. The second buy signal was formed at the beginning of the US session, around the same level. In this case, the pair moved 25 pips in the right direction. That's what beginners could have gained on Monday. It was a low-volatility day for the pound. Trading tips on Tuesday: On the 30-minute chart, the GBP/USD pair broke the short-term downtrend. Now, the pound may correct higher, but we shouldn't expect a strong uptrend. We expect the pound to fall, as we still believe it is overbought and unreasonably expensive. The key levels on the 5M chart are 1.2538, 1.2597-1.2605, 1.2653, 1.2688, 1.2748, 1.2791-1.2801, 1.2848-1.2860, 1.2913, 1.2981-1.2993, 1.3043. Once the price moves 20 pips in the right direction after opening a trade, you can set the stop-loss at breakeven. On Monday, there are no important events or reports lined up in the US and the UK, so we should brace ourselves for another low-volatility day with no trends. The pair may continue its slow upward movement within the corrective phase.     Basic trading rules: 1) The strength of the signal depends on the time period during which the signal was formed (a rebound or a break). The shorter this period, the stronger the signal.   2) If two or more trades were opened at some level following false signals, i.e. those signals that did not lead the price to Take Profit level or the nearest target levels, then any consequent signals near this level should be ignored.   3) During the flat trend, any currency pair may form a lot of false signals or do not produce any signals at all. In any case, the flat trend is not the best condition for trading.   4) Trades are opened in the time period between the beginning of the European session and until the middle of the American one when all deals should be closed manually.   5) We can pay attention to the MACD signals in the 30M time frame only if there is good volatility and a definite trend confirmed by a trend line or a trend channel.   6) If two key levels are too close to each other (about 5-15 pips), then this is a support or resistance area.     How to read charts: Support and Resistance price levels can serve as targets when buying or selling. You can place Take Profit levels near them. Red lines are channels or trend lines that display the current trend and show which direction is better to trade. MACD indicator (14,22,3) is a histogram and a signal line showing when it is better to enter the market when they cross. This indicator is better to be used in combination with trend channels or trend lines. Important speeches and reports that are always reflected in the economic calendars can greatly influence the movement of a currency pair. Therefore, during such events, it is recommended to trade as carefully as possible or exit the market in order to avoid a sharp price reversal against the previous movement. Beginners should remember that every trade cannot be profitable. The development of a reliable strategy and money management are the key to success in trading over a long period of time.      
Analyzing Tuesday's GBP/USD Trades: Signals, Levels, and Trading Strategies

Unpacking the Latest US CPI Data: Impact on Fed Policy and USD Exchange Rates - Insights from Paweł Majtkowski, eToro Market Analyst

Pawel Majtkowski Pawel Majtkowski 10.08.2023 16:47
In Conversation with Paweł Majtkowski: Deciphering the Recent US CPI Surge and Its Implications for Fed Policy and the USD. FXMAG: How would you comment on the CPI reading from the US? Can it somehow affect Fed policy and USD quotes? U.S. inflation rose for the first time after 13 months of declines. However, this was not a surprise, as the markets had expected such a scenario. In the end, inflation came in at 3.2% y/y, 0.1 pp. lower than market expectations. Inflation in the U.S. rose, as it is mainly a statistical base effect. Inflation peaked in 2022 and there is currently no return to such inflation readings.  It's worth noting that services inflation (excluding rents), which analysts and the Fed have been watching the most recently, has been at around 3 percent all along. It is the rise in services prices that the Fed has been most keen to bring down recently. Therefore, the current rise in CPI inflation should not translate into further interest rate hikes. It seems that all along the most likely scenario is a pause and the first rate cuts in the first half of 2024. Inflation may still rise in the following months, but it will no longer be out of the Fed's control.  But of course, the battle against inflation has not yet been definitively won, and stubborn and prolonged inflation at 3-4% could be disruptive to the economy, and in the long run distort the way we think about our money. This reading may also temporarily strengthen the dollar, but this effect is unlikely to be long-lasting.   Paweł Majtkowski, eToro Market Analyst  
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FX Market Update: Chinese Turmoil and G10 Volatility

ING Economics ING Economics 18.08.2023 09:52
FX Daily: Quiet G10 markets despite Chinese turmoil Beijing continues to fight the recent turmoil on multiple fronts: real estate, financial, and the FX market. Overnight, the PBoC set the CNY fixing with the largest gap to estimates in order to curb bearish speculation. Despite all the turmoil in China, G10 volatility has remained capped, and this is probably why Japanese authorities are not intervening.   USD: Chinese authorities go all in to defend the yuan Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment, especially after the Fed minutes proved to have limited implications for central bank expectations and developed market calendars are quite light. Overnight, Chinese authorities turned their focus on the FX market, deploying what is now regarded as the biggest defence of the yuan via fixing guidance on record. The People's Bank of China (PBoC) fixed USD/CNY at 7.2006, significantly below the average estimate of 7.305, which marks the largest gap compared to the estimate since the poll started in 2018. Today’s PBoC move follows yesterday’s reports that state-owned banks were asked by Chinese authorities to step up yuan interventions to reduce FX volatility. We could also see a cut in FX reserve requirements, often considered as a tool to avert sharp CNY depreciation. So far, the spillover into G10 currencies has been limited. The highly exposed AUD is down 1.4% this week, a relatively contained slump considering the amount of bad news that has piled up in the past few days. This is probably a signal of how AUD was already embedding a good deal of negatives related to China and how markets are expecting government intervention to avert black swan scenarios. This morning, the emergency yuan fixing has left FX markets quite untouched, with the exception of USD/JPY trading on the soft side, likely due to Japan’s service inflation hitting 2% for the first time in 30 years overnight. Incidentally, the pair is well into FX intervention territory but is probably missing enough volatility to worry Japanese officials. Still, the oversold conditions of JPY and the threat of interventions are likely going to exacerbate any USD/JPY downside corrections. The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday. The combined effect of high yields and growing risks in China suggests the balance of risks is moderately tilted to the upside for the dollar. A return to 104.00 in DXY remains a tangible possibility in the coming days.
EUR/USD Downtrend Continues Amidst Jackson Hole Symposium Anticipation

EUR/USD Downtrend Continues Amidst Jackson Hole Symposium Anticipation

InstaForex Analysis InstaForex Analysis 21.08.2023 13:24
The downtrend prevails for the EUR/USD pair, falling for the fifth consecutive week. In mid-July, the pair reached a multi-month high at 1.1276, but then sellers took over, as the dollar strengthened and the euro weakened. Last week, bears managed to settle around the 1.08 figure, but they couldn't stay below the support level of 1.0850 (the lower line of the Bollinger Bands indicator on the daily chart), even though they tested this target. The driver of the bearish movement was the USD, which strengthened amid mixed inflation data, hawkish Federal Reserve minutes, decent economic reports, and growing risk-off sentiment. The euro obediently followed the greenback, seemingly content with its role as a "follower" rather than a "leader." This week, the focus will be on the dollar, which, in turn, is anticipating the key event of the month. The event in question is the annual economic symposium held in Jackson Hole, Wyoming. The significance of this event cannot be overstated. The Jackson Hole symposium is often referred to as a "barometer" for the sentiment of central banks in leading countries. As is known, the forum is attended by central bank leaders from major countries (usually at the level of chairmen or their deputies), finance ministers, leading economists and analysts, and heads of the world's largest conglomerates and banking giants. For three days, they discuss pressing issues, crystallize certain signals, and define the main points of further steps.   Typically, the financial elite discusses the most urgent issues at the time. For example, in 2015, the main topic was the crash on the Shanghai Stock Exchange, in 2016 the discussions focused on the consequences of Brexit, and in 2017 the expansion of bond spreads and the next steps of the Fed and European Central Bank were discussed. In 2018, the central topic of the meeting was the trade war between the US and China (or rather its consequences), in 2019, the global trade conflict was discussed again, as well as the impending Brexit. In 2020, the sole topic was the coronavirus crisis, in 2021, the aftermath of the crisis. The key issue discussed at Jackson Hole last year was inflation. It is evident that participants at this week's meeting will also focus on this issue, given the grim macroeconomic news from China. During the three-day symposium, which starts on August 24th, many central bank heads and representatives will speak and may outline their future course of actions in the context of monetary policy prospects. In particular, Fed Chair Jerome Powell is expected to speak on Friday – if he adopts a hawkish stance, the US dollar will get another boost across the market, including against the euro. The latest US data maintains the intrigue on the Fed chair's stance, so we can guarantee the volatility for the EUR/USD pair (as well as other dollar pairs). In short, the recent inflation reports have been somewhat contradictory.   The Consumer Price Index in July showed an uptrend – for the first time in the last 12 months. The indicator rose to 3.2% year-on-year after June's result of 3.0%. However, the core CPI decreased to 4.7% (the lowest level since July 2021). The Producer Price Index was in the "green" – both in annual and monthly terms. The PPI rose by 0.8%, compared to a forecast of 0.3%. The indicator had been steadily declining for 12 months, but it accelerated last month (for comparison, in June 2022 the PPI was at 11.3%, in June 2023, it was already at 0.1%). The core PPI also consistently declined over several months but remained at June's level in July, i.e., at 2.4%. The report on the Import Price Index similarly favored the greenback. According to data published last week, the index in monthly terms was above zero for the first time since April 2023. It is also necessary to recall the latest Non-farm Payrolls, specifically the "green hue" of the pro-inflationary indicator. The level of average hourly wage increased by 4.4% YoY in July, while experts expected a decrease to 4.1% (the indicator has been at 4.4% for four consecutive months). The question emerges - will Powell focus on the acceleration of the CPI and the dynamics of the PPI? Or will the core CPI and the basic PCE index, which showed a slowdown in inflationary processes, be the focus of his speech? According to data from the CME FedWatch Tool, the chances of a quarter point rate hike at the September meeting is currently only 11%. The likelihood of a rate hike at the November meeting is 33%. Powell may reinforce hawkish expectations regarding the Fed's future course of actions if he is concerned about the growth of the aforementioned inflation indicators. In this case, the Fed Chair will trigger a dollar rally, as a result of which the EUR/USD pair may not only fall to the base of the 8th figure but also test the support level of 1.0750 (Kijun-sen line on the daily chart).   However, if Powell focuses on the side effects of aggressive monetary policy (especially in light of recent decisions by rating agencies Moody's and Fitch), the dollar will be under pressure: in this case, EUR/USD buyers may be able to return the pair to the range of 1.0950-1.1030. Of course, apart from the economic symposium, EUR/USD traders will react to other fundamental factors in the background during the upcoming week (PMI indices, IFO, orders for durable goods, secondary housing sales in the US). However, Powell's speech is the main event not only of the upcoming week but probably of the whole of August in general.    
Dollar Strength Continues as 10-year Treasury Surges to 4.34%, Reaching Highest Levels Since Financial Crisis

Dollar Strength Continues as 10-year Treasury Surges to 4.34%, Reaching Highest Levels Since Financial Crisis

Kenny Fisher Kenny Fisher 22.08.2023 09:10
Canadian Dollar Experiences Biggest Intra-day Gain Since End of July. The Canadian dollar has been experiencing a steady weakening against the US dollar since mid-July. The ongoing bullish uptrend of USD/CAD is meeting resistance as foreign exchange traders speculate on the possibility of the Fed and BOC being close to completing their tightening cycles with one more rate hike. Major resistance at the 1.36 level could hold, potentially leading to a pullback targeting the 1.3454 level, the current 200-day SMA. The upcoming week might bring a hawkish stance from Fed Chair Powell, which could revive the king dollar trade. Oil Market Rally Fizzles Amid Strong Dollar Trade and Rising Real Yields Crude oil prices initially rallied in the morning, driven by expectations of a tight oil market due to current backwardation trends. However, the surge in real yields and a potential strong dollar resurgence after Jackson Hole are contributing to the reversal of the oil price rally. While risks to crude demand are emerging, the oil market's tightness should provide some support.     Dollar supported as 10-year Treasury hits 4.34%, highest levels since financial crisis Oil market to remain tight, but so far offers little help for the loonie Loonie was having biggest intra-day gain since end of July   The Canadian dollar has been steadily weakening against the greenback since the middle of July.  The USD/CAD bullish uptrend appears to be facing some resistance as FX traders anticipate both the Fed and BOC are possibly one more rate hike away from being done with tightening. It appears that major resistance from the 1.36 level might hold, so if a pullback emerges, downside could target the 1.3454 level, which is currently the 200-day SMA.  If markets get a very hawkish Fed Chair Powell this week could see the return of the king dollar trade.   Oil The morning oil price rally is fizzling as the strong dollar trade might be back given the surge in real yields.  Crude prices were much higher in early trade on expectations that the oil market would remain tight given the current backwardation. Risks to the crude demand outlook are growing, especially after China disappointed with last night’s easing, but for now a tight market should keep oil supported. The biggest risk for energy traders is if we see a massive wave of dollar strength after Jackson Hole. Right now there are so many oil drivers and most support higher prices. Heating oil prices are elevated and that might continue.  Iran nuclear talks won’t be having any breakthroughs anytime soon. Gulf of Mexico oil production could be at risk as a few formations build on the Atlantic.     Gold Gold’s worst enemy is surging real yields.  It was supposed to be a quiet start to the week for gold with China coming to the rescue and some calm before Friday’s Jackson Hole speech by Fed Chair Powell.  There is a little bit of nervousness from the long-term bulls as gold futures are getting dangerously close to the $1900 level, which could trigger a wave of technical selling.  It seems gold needs some disorderly stress in financial markets for it to rally and that doesn’t seem like it is happening anytime soon. The outlook for the next few quarters is cloudy at best, but it seems that there is still too much strength in the economy that is dampening safe-haven flows for gold.  It doesn’t help that hedge funds are throwing in the towel for gold, which now has net-long positions at a five month low.        
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BRICS Summit Focuses on Bolstering Trade and Currency Cooperation Amid Yuan's Weakening

Kenny Fisher Kenny Fisher 23.08.2023 11:05
Xi meets Ramaphosa and discuss how to bolster trade in their own currencies Yuan still weakens despite PBOC’s most forceful fixing on record BRICS might lead to more investment in Africa, potentially bolstering rand   The annual BRICS Summit begins in Johannesburg with China’s President Xi meeting South African President Ramaphosa.  China and India have enjoyed 25 years of diplomatic ties and are looking to bolster trade and investment with more countries.  The three-day summit will be attended by leaders of China, India, Brazil and South Africa, as well as 30 African leaders. Russian President Putin will be participating via video conference as he has an international arrest over alleged war crimes in Ukraine.  Russian Foreign Minister Lavrov will represent Russia at the summit. BRIC nations make up a quarter of the global economy, so their voice will clearly be listened to, especially if they expand.  So far, 22 other countries have formally applied to join the bloc, but it seems difficult for the institution given they do not have a BRICS currency that can challenge the dollar.  The current members have lots of challenges to go all-in with de-dollarization and embrace a BRICS currency.  India does not want a China-led initiative. Given all the sanctions Russia is facing, they have billions of rupees that are stranded. There is no easy solution that can address all the problems facing the key members, which means they will take small steps, which include expanding use of a development bank to help with lending.   5-year USD/CNH, USD/INR, and USD/BRL The 5-five year chart above shows how robust the dollar has been against the yuan and rupee in 2023, with Brazil and their attractive interest differential being the one standout.  Alternatives to the dollar in trade will grow, but for now the big risk is the great refinancing that will occur over the next year could lead to extreme turmoil for emerging markets and that might keep the dollar supported against most of the BRIC currencies. The weekly USD/CNH and USD/INR chart below exemplifies how overbought this dollar trade has become.  There is a lot of macro risk on the table this week and FX markets could see either a strong extension of dollar strength or a major pullback.    
ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ECB Hawkish Pushback and Key Inflation Test Await FX Markets

ING Economics ING Economics 29.08.2023 10:13
FX Daily: ECB hawkish pushback to face key inflation test The ECB hawks have stepped in to revive depressed rate expectations, but markets are opting for data dependency, and EUR/USD is set to face two key risk events with eurozone inflation figures before the US payrolls this week. We expect core inflation will prove resilient enough to trigger another ECB hike, so see upside room for the pair.   USD: Things will get hectic this week It has been a slow start to the week for FX markets. Yesterday’s closure of the UK’s markets for a national holiday meant much thinner trading volumes, and the key data calendar was quite light. In the US, the only release to note was the Dallas Fed Manufacturing Index, which dropped slightly more than expected into contraction territory, confirming the slack in the manufacturing territory already signalled by other surveys (ISM, PMIs). Still, the slowdown in manufacturing activity is hardly a US-only story. We have seen a deterioration in global forward-looking economic indicators in many developed economies recently, especially in Europe. The difference now is how the US service sector is appearing more resilient than the eurozone’s, despite significantly tighter monetary policy in the US. The relative strength in US activity indicators – compared to the rest of the world and to expectations – is what has kept the dollar in demand over the past few weeks, and should remain the number one driver of USD moves into year-end. That is because the disinflationary process appears to be cementing, allowing the Fed to halt hikes and focus on growth: until data turn for the worst, however, markets will not be pricing in more cuts, and a favourable real rate (the highest in the G10) will keep a floor under the dollar. This week presents some important risk events for the dollar from this point of view. Today, the JOLTS job openings for July will be watched closely in search for signs that the labour market has started to cool off more drastically. The Conference Board consumer confidence index is also published, and expected to come in only marginally changed compared to July. Later in the week, we’ll see ADP jobs numbers (they move the market, but tend to be unreliable), and the official payrolls report. Remember that payrolls through March were revised lower (although that is a preliminary revision) by 306,000, which probably adds extra heat to this week’s release. DXY is trading around the May-June 104.00 high area. Investors may want to wait for confirmation from jobs data to push the dollar significantly higher from these levels, and a wait-and-see, flat (or moderately offered) dollar environment could dominate FX markets into Friday’s payrolls.
FX Daily: Eurozone Inflation Impact on ECB Expectations and USD

FX Daily: Eurozone Inflation Impact on ECB Expectations and USD

ING Economics ING Economics 30.08.2023 09:47
FX Daily: Eurozone inflation, round one Spain and Germany will release inflation figures today, and market expectations for the ECB's September meeting may already be impacted. Eurozone numbers are out tomorrow. Meanwhile, ADP payrolls are out in the US after a soft batch of data hit the dollar yesterday, while AUD is shrugging off lower-than-expected CPI figures.   USD: ADP could be inaccurate, but may move the market Two softer-than-expected data releases in the US yesterday prompted a sizeable correction in the USD 2-year swap rate yields, which fell from 4.94% to the 4.80% area. JOLTS job openings data fell to 8.8 million in July, meaning there were approximately 1.5 open positions for each unemployed worker – the lowest ratio since September 2021. The hiring rate declined marginally, but the layoff rate was unchanged. Consumer confidence figures also disappointed, with the Conference Board survey dropping from a revised 114 level in July to 106 in August. Other components of the survey also declined. The rally in pro-cyclical currencies and the dollar’s weakness across the board was a confirmation of how US activity data – even if non tier-one releases – remain firmly in the driver's seat for global currency markets. Developments in China and in the commodity sphere, while important, clearly continue to play a secondary role. Today, expect markets to focus on the ADP employment figures. These have not proven to be a very accurate estimator of the official payrolls recently but have often impacted rate expectations. The consensus is for a 195k print. Wholesale inventories and pending home sales for July, as well as the GDP and core PCE secondary release for the second quarter, are also on the calendar today. The dollar is regaining some ground this morning after yesterday’s losses, but data will determine the direction of travel today. We had called for a weaker dollar at the start of this week and we’d like to see whether eurozone inflation data boost the chances of one last hike from the European Central Bank. With markets being more convinced of no more hikes by the Federal Reserve – barring a surprise in payrolls – a re-tightening in the EUR/USD short-term real rate gap could set the tone for a weaker dollar across the world. DXY may continue its correction from the 104.00 highs and test 103.00 should eurozone inflation figures come in strong enough and US employment not surprise on the upside. 
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The Dollar's Resilience and Overvaluation Against G10 Currencies Amidst Quiet Markets

ING Economics ING Economics 05.09.2023 11:20
FX Daily: Economic resilience keeps dollar ‘expensive’ Our short-term fair value model indicates the dollar is overvalued against all G10 currencies, but recent price action suggests it will take some poor US activity data to prompt a USD correction. That may not happen this week, as developed market calendars are quite dry. Elsewhere, the Reserve Bank of Australia paused, but the AUD demise looks overdone.   USD: Comfortably overvalued With US trading halted yesterday for the Labour Day holiday, global FX markets started the week on a very quiet tone after Friday’s big swings. In short periods like this one where attention temporarily shifts away from the US, developments in China emerge as the main driver for global sentiment. Yesterday, hopes of fiscal stimulus triggered a rebound in Chinese property stocks, but a below-consensus read in the Caixin Services PMI overnight generated fresh pressure on Asian equities. While the equity compartment appears to respond more symmetrically to good and bad news coming from China, the currency market remains more responsive to negative developments, as the ongoing period of dollar strength contributes to limit gains for most Asian EMFX. More specifically, the renminbi still faces pressure from easing monetary policy in China, to which the People's Bank of China (PBoC) has recently paired a cut to the FX reserve ratio requirement to try and insulate the currency-depreciation effects. This morning, we are seeing USD/CNY trading higher after the poor PMIs and re-testing the 7.30 area, which has been the line in the sand for the PBoC. On the US front, we discussed in yesterday’s FX Daily how this week’s data calendar looked unlikely to radically alter the narrative of US economic resilience, which has been the foundation of recent dollar strength. Today’s calendar is quite light, only including July’s factory orders. From a technical point of view, we must note that the dollar’s outperformance in August was not entirely justified by market drivers (i.e. relative rates, equity, and commodity dynamics). Our short-term fair value model shows some dollar short-term overvaluation against all G10 currencies, ranging from quite moderate for GBP (less than 1%) to quite stretched for Scandies (above 3%). Still, one characteristic of the recent dollar price action is that it has taken poor US data to initiate any substantial correction, and we suspect a deterioration in the economic outlook remains the only real path for the mis-valuation gap to be closed. What this gap is telling us now is that the dollar correction, once the US data turn, can be quite rapid and substantial.    Francesco Pesole
FX Market Update: Dollar Strengthens on Higher-For-Longer Narrative Amid US Data Resilience

FX Market Update: Dollar Strengthens on Higher-For-Longer Narrative Amid US Data Resilience

ING Economics ING Economics 08.09.2023 10:54
FX Daily: Higher-for-longer narratives unfold A strong services ISM read helped consolidate the notion of higher-for-longer rates in the US, helping the dollar stage another rally. In the UK, Bank of England commentary is shifting away from 2023 hikes to a similar narrative. Meanwhile, the EUR, SEK and other pro-cyclicals remain vulnerable despite better Chinese data.   USD: 2024 part of the USD curve driving dollar higher September has so far seen the dollar’s bullish momentum cement, and DXY is testing the 105.00 levels this morning – the highest seen since March. We want to stress that the bulk of the dollar strengthening is coming from easing bets in 2024 being scaled back rather than any expectations that the Federal Reserve will hike again this year. Let’s take the pricing of the USD forward rate curve for the two meetings in November 2023 and June 2024 as an example. The former has been stable in pricing in a peak rate of around 5.60-5.65% (less than one hike from the current 5.50%) since the start of July, having been capped by evidence of disinflation and Fedspeak that has gradually diverged from the dot plot projections. The June 2024 contract has faced multiple hawkish re-ratings, from a 4.75% bottom in mid-July to the current 5.25%. A market that continues to push forward the start of Fed monetary easing, embracing a “higher for longer” narrative on the back of US activity data resilience, is offering few reasons to doubt the dollar will stay supported for now. Yesterday, August’s ISM services index beat expectations and also suggested re-building inflationary pressures, which should keep the Fed away from sounding too dovish as they are expected to keep rates on hold at the September policy meeting.   There are many Fed speakers to watch today: Patrick Harker, Austan Goolsbee, John Williams, Raphael Bostic and Michelle Bowman. On the data side, things are much quieter, and the focus will only be on the weekly jobless claim figures, which are expected to climb to 234k. We discussed earlier this week how the dollar was overvalued in the near term against all G10 currencies. This is still the case, although a further hawkish repricing in Fed rate expectations would compress the mis-valuation, and the current market conditions can keep the dollar expensive for longer. A consolidation into the 105.00/105.50 in DXY looks plausible at this stage. Overnight, we saw a less pronounced slump in Chinese exports compared to expectations, but the beneficial impact on pro-cyclical currencies is proving quite modest, once again showing how the US activity and dollar story is the predominant one.
Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

Sticky US Inflation Expected to Maintain Dollar Strength Ahead of FOMC Meeting

ING Economics ING Economics 13.09.2023 08:52
FX Daily: Sticky US inflation to keep dollar bid Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative.   USD: CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.
US Treasury Rates Hold Strong as Inflation Report Looms, Dollar Resilience Continues

US Treasury Rates Hold Strong as Inflation Report Looms, Dollar Resilience Continues

Kenny Fisher Kenny Fisher 13.09.2023 09:03
Treasury rates remain attractive: 2-year at 5.009%, 5-year at 4.428%, 10-year at 4.288%, and 30-year at 4.370% US inflation report expectations are for core readings to remain subdued, while headline jumps on rising gas prices. CPI M/M: 0.6%e v 0.2%; Y/Y: 3.6%e v 3.2% prior; core m/m: 0.2%e v 0.2% prior; y/y: 4.3.%e v 4.7% prior Fed rate hike expectations are pricing in slightly a greater chance of more tightening this winter. Implied rate peak at 5.452% vs 5.446% last Tuesday.   USD/JPY is not ready to turn bearish despite BOJ Governor Ueda’s verbal intervention that kicked off the trading week.  The higher for longer and risks of more Fed tightening could keep the dollar supported a little while longer.  This afternoon’s US 10-year auction went as planned, awarding 4.289%, which was the highest yield since 2007.  Yesterday we saw strong demand for the Treasury’s three- and six-month bill auctions.  The flows that are coming the dollar’s way are not going to be easing anytime soon and that should provide a level underlying support for the dollar. The big risk for the dollar is if inflation cools and economic resilience quickly vanishes.  A bearish dollar outlook should not be the base case just yet, but if the data suggests that is happening currency markets could jump on that trade.       While dollar strength has resumed it is still over 50 pips away from levels that trade before BOJ Governor Ueda’s comment on a ‘quiet exit’ reducing monetary policy easing.  This week will either see a resilient US economy force more jawboning from Japan, or support the belief that the Fed’s done raising rates.  Initial support resides at the 146.80 level, followed by Monday’s low of 145.90. To the upside, key resistance is provided by the 147.90 level, followed by the psychological 150 handle.    
US Inflation Report Sets the Tone for Upcoming FOMC Meeting

US Inflation Report Sets the Tone for Upcoming FOMC Meeting

ING Economics ING Economics 14.09.2023 08:39
Today sees the last major US inflation report ahead of the next FOMC meeting on 20 September. Higher gasoline prices and base effects are expected to push August CPI up to 3.6% YoY, and on a core and month-on-month basis, we also see an upside risk to the 0.2% MoM consensus estimate – clearly not enough to feed a bearish dollar narrative USD CPI figures to keep the dollar firm The highlight of today's session will be the August US CPI release. As our US economist James Knightley discusses here, the headline year-on-year rate is expected to rise to 3.6% from 3.2% on base effects and higher gasoline prices. And while the core YoY rate may drop to 4.4% from 4.7%, an above consensus core month-on-month reading – possibly on the back of airfares and medical costs – will hardly support any narrative of the Federal Reserve's work being done. This will probably lay the groundwork for a reasonably hawkish FOMC meeting this time next week, where despite unchanged rates, the Fed will (through its Dot Plots) hold  out the threat of one further hike this year. All of the above should keep the dollar reasonably bid and keep policymakers in the likes of China and Japan busy fighting local currency weakness (more below). We are bearish on the dollar from the fourth quarter of this year, but this bearish narrative requires a few more weeks of patience. We favour DXY edging back to the top of its 104.50-105,00 range today.   Chris Turner.
Senior Fed Officials Signal Rate Hike Pause as Key Economic Indicators Awaited

Senior Fed Officials Signal Rate Hike Pause as Key Economic Indicators Awaited

FXMAG Team FXMAG Team 14.09.2023 08:46
This week saw a flurry of remarks from senior Fed officials, including Fed Governor Christopher Waller on 5 September and NY Fed President John Williams on the 7th. Waller said recent economic news will allow the Fed to "proceed carefully" and that "there's nothing that is saying we need to do anything imminent anytime soon," suggesting the FOMC may skip a rate hike in September. Senior Fed officials signal rate hike pause in September However, he was less definitive about the need for further hikes, saying "we have to wait and see" if current trends such as slowing inflation continue. Governor Williams also hinted at a pause, saying that monetary policy was having the expected effects, but that it was "an open question" as to whether further rate hikes were needed. We see these remarks essentially as advance notice ahead of the blackout period before the FOMC which starts from this weekend. This has worked to pause the rise in UST yields and dollar strength ahead of the weekend. However, the CPI for August, retail sales, and other economic indicators will be announced next week, and these will be key for the Fed's monetary policy decisions due to its data dependent stance. We do not expect such data to change the trend of the foreign exchange market unless the results differ significantly from market forecasts given the FOMC meeting is scheduled for the following week, and the focus of the FOMC has shifted to whether the Fed will raise rates and the forecast of the rate cuts in 2024 which is expected to be shown in the dot plot. Naturally, now that expectations of prolonged monetary tightening are emerging due to the improvement in the US economy and the recent rise in oil prices, if economic indicators exceed expectations, the dollar is likely to strengthen and this would overshadow risk to the downside.
Fed's Final Hike Unlikely as Economic Challenges Loom

Fed's Final Hike Unlikely as Economic Challenges Loom

ING Economics ING Economics 18.09.2023 09:10
We don't think the Fed will carry through with that final forecast hike. The combination of higher borrowing costs and less credit availability plus pandemic-era savings being exhausted and student loan repayments restarting should mean that households feel more of a financial squeeze in the fourth quarter and beyond. Rising credit card and auto loan delinquencies also hint at more pain with the Federal Reserve’s Beige Book warning that we may be in "the last stage of pent-up demand for leisure travel from the pandemic era". The concern is that economic softness could go too far (as highlighted by some officials in the July FOMC minutes) and heighten the chances of recession. Given this risk and the positive developments on inflation and labour costs, we think the Fed will be on hold for a number of months with the data flow gradually weakening the case for a November or December rate hike – which the market itself only gives around a 50:50 chance. Our base case continues to be more aggressive interest rate cuts through 2024 than suggested by the Fed and priced by financial markets.   A word on r* There has been some chatter about the Fed adjusting its expectation for the long run forecast for what the Fed funds target rate should be, which would be a big story given the anchor this provides for longer dated Treasury yields. This has been put at 2.5% for quite some time, but as the graphic below shows we have started to see individuals nudge their own assessments higher. The momentum suggests it is only a matter of time before it does indeed change.   FOMC individual member expectations for longer run Fed funds rate   Our own assessment is that it is likely to be closer to 3%. Fiscal policy has been loosened significantly under the Trump and Biden administrations and we don’t see that changing anytime soon – the Bloomberg consensus is for the US to run a fiscal deficit of 6% out to 2025. This will mean that monetary policy will need to be more restrictive in order to keep inflation under control. On top of this we have the so called “Triple D” of demographics, decarbonisation and deglobalisation, which will all keep upward pressure on inflation and interest rates. Regarding demographics, Baby boomers have been saving for retirement which has contributed to a glut of savings, driving down real interest rates. This process is ending as they liquidate the accumulated savings while shrinking birth rates means more competition for workers that could put upward pressure on wages. As for decarbonisation, switching from cheap and abundant fossil fuels to renewables is expensive and then there is the issue of storage and expanding the electrical grid. Energy bills are likely to be higher, which will increase costs throughout the economy. Then on deglobalisation – Covid, Russia-Ukraine, China-Taiwan have highlighted concerns about stability of global supply chains. Re-shoring and “friend-shoring” is now in vogue, but this will be disruptive and expensive, putting up costs. As such, we believe it is only a matter of time before the Fed formally declares that interest rates, over the longer term, will need to be higher than we experienced over the past 20 years.   Market rates more focused on where the Fed funds rate is in 2025. And liquidity excesses to tighten more in 2024 The journey for market rates in recent weeks has been impacted by the reduction in the size of the rate cut discount as priced by the markets out to 2025. In that sense there has been some separation between delivery of Fed policy up front and direction for market rates, with market rates rising while the immediate Fed policy rate call has been broadly non-committal (the market discount). That said, the probability for a future rate hike has been on the rise of late, relative to a clearer discount for no change only a couple of week ago. Still, the bigger impact for longer tenor rates is dominated by how low the funds rate can get to when the Fed turns to cutting. Currently that is not much below 4%. We think that will be forced lower as the economy weakens. But it is where it is for now, and that’s helping to keep the 10yr Treasury yield well above 4%, with a tendency to test towards 4.5% (Fed funds low plus a 30-50bp term premium). In terms of liquidity circumstances, the Fed will acknowledge that the volume of cash going back to the Fed on the reverse repo facility has fallen to US$1.5tr; that’s down some US$1tr from its peak. It’s an important milestone, one that is an echo of the ongoing balance sheet roll-off of Treasuries and MBS from the Fed’s balance sheet (US$95bn per month). Interestingly bank (excess) reserves have not fallen, and in fact if anything they have risen some, now in the US$3.3tr area. This is comfortable, and indicative of ongoing ample liquidity conditions despite the ongoing (soft) quantitative tightening. The Fed might like to comment on this too, largely asserting that this is a good thing, where the falls in balances going into the Fed’s reverse repo facility is the more natural means to excesses exiting the system. The reverse facility has been doing its job, and as balances ease it implies less need for a job to be done. It will feel tighter when bank reserves fall, likely through 2024 and into 2025.   Few reasons for dollar to hand back gains, yet The dollar is going into the September Fed meeting at the strongest levels since March. The concept of US ‘exceptionalism’ (both in growth and interest rates) looms large over the market and as yet there have been few reasons to bet against the dollar. The event risk of the September FOMC meeting does not seem a particularly bearish one for the dollar. As above, we are not expecting the Fed to call time on its tightening cycle. And by leaving one more hike in the dot plot, the Fed can avoid yields at the long end of the bond market slipping too far and providing premature stimulus. Indeed, the greater risk might be the Fed scaling down its dot plot median forecast of a 100bp easing cycle in 2024. A hawkish September FOMC does not mean the dollar has to rally a lot. But assuming there are no surprises, it probably means ideas of a prolonged pause in the policy cycle will see interest rate volatility fall even further and demand for the carry trade stay strong. In practice, this could see USD/JPY work its way much closer to 150 and provoke Japanese authorities into intervention – as they did this time last year. Expect EUR/USD to trade on the soft side now that the ECB has told us that rates have peaked. However, we suspect good demand will emerge near the 1.05 level. Our house call is that US ‘exceptionalism’ does not last and that US growth converges on the weak eurozone story into 2024. Typically, November and December are seasonally weak months for the dollar. Our call is that weaker US activity data will become evident over time and that the current period will come to be viewed as ‘as good as it gets’ both for US growth and the dollar. We are sticking with our call that EUR/USD will be trading above 1.10 by year-end. 
USD/JPY Climbs to Multi-Year High as BOJ Stands Firm on Policy

A Week of Central Bank Meetings and Currency Moves: FX Daily Insights

ING Economics ING Economics 18.09.2023 09:33
FX Daily: Up and down - a big week for policy rates and currencies There are a plethora of central bank policy rate meetings this week across the developed and emerging market economies. Rates could be raised as much as 500bp in Turkey, cut 50bp in Brazil, raised 25bp in four G10 economies, and left unchanged in the US. Our baseline assumes that the dollar holds onto its strength through the week.   USD: Dollar looks likely to hold gains It is a big week for policy rate meetings, with six of the G10 central banks in action. Setting the tone for global markets will be Wednesday's FOMC meeting. Here, our team sees a resolutely hawkish Federal Reserve, where despite unchanged rates the Fed, through its statement and dot plots, will hold out the possibility of one further hike to the 5.50-5.75% range later this year.  Even though we should see 25bp rate hikes across four European central banks through the week - see below - we doubt the dollar has to lose much ground - if any. The prospect of a prolonged period of unchanged rates is depressing US interest rates and cross-market volatility and leaving carry trade strategies very much en vogue. This - plus Brent trading close to $95/bbl - is keeping the likes of USD/JPY bid and few expect any substantial move in Bank of Japan policy this Friday. If there is to be a further move from Japan - it will likely come in late October when new economic forecasts are released. It is also a big week for policy rate meetings in emerging markets. In EMEA, the highlight will be whether the Central Bank of Turkey delivers another large hike on Thursday (+500bp expected) in a continuing return to policy orthodoxy, while Brazil should cut rates another 50bp in line with recent guidance. Given the strong interest in the carry trade this year, both the Turkish lira and Brazilian real could stay supported despite these diverging rate stories.  Elsewhere, Asia sees several rate meetings this week, but change is expected in neither China's Loan Prime Rates nor policy rates elsewhere in the region. DXY remains relatively strong and there does not seem a case for a decisive turn lower this week - unless we are all surprised by the Fed. There is a strong band of resistance in the 105.40/80 area, which may well cap this week. But equally, DXY should continue to find decent demand below 105.00. 
EUR/USD Faces Pressure Amid PMI Releases: Is More Downside Ahead?

EUR/USD Faces Pressure Amid PMI Releases: Is More Downside Ahead?

ING Economics ING Economics 25.09.2023 11:08
EUR: More pain from the PMIs? EUR/USD remains under pressure as dollar strength dominates. The euro faces an event risk from today's releases of the flash PMIs for September. It really has been the PMI releases that have hit the euro since the summer. Despite all this pessimism about the euro, however, the ECB's trade-weighted euro is only 2% off its highs in July. This can probably be read as both the strong dollar being the dominant story and the eurozone's trading partners (Europe and China) faring as poorly as the eurozone. For EUR/USD, an imminent turnaround looks unlikely and support at 1.0600/0610 looks the last barrier before what seems the more likely dip to the 1.05 area. As discussed in the Swiss National Bank (SNB) review, the dovish turn from the SNB did not do too much damage to the Swiss franc since the SNB is still selling FX. Expect EUR/CHF to get back to 0.95 over the coming months. Chris Turner Elsewhere, both the Riksbank and Norges Bank hiked by 25bp yesterday, in line with expectations. The Riksbank signalled close to a 50% implied probability of another hike in its rate projections, matching market pricing. The Governor said there is a high probability of more hikes, but there seems to be low conviction within the Board. As discussed in our meeting review, this was a missed opportunity for policymakers to deliver real support to the krona, which averted a slump only thanks to the announcement that FX reserves will be hedged. Please see the background on that topic here. SEK remains vulnerable in the near term, and EUR/SEK can break the 12.00 ceiling soon. Norges Bank was more hawkish, as it explicitly signalled another hike should be delivered in December, although that should be the last one. EUR/NOK was only modestly offered and remains tied to the 11.50 level: a confirmation that a NOK rebound (or further depreciation) relies almost entirely on external factors. Francesco Pesole
Gold's Resilience Amidst Market Headwinds: A Hedge Against FOMC's Soft-Landing Failure

Gold's Resilience Amidst Market Headwinds: A Hedge Against FOMC's Soft-Landing Failure

Saxo Bank Saxo Bank 26.09.2023 15:20
As mentioned in previous updates, the reason why gold in our opinion has been holding up well despite the mentioned headwinds, is likely to be a market in search for a hedge against the current negative market sentiment and most importantly, the FOMC failing to deliver a soft, as opposed to a hard landing. A hard landing or stagflation may occur if the Fed keeps the Fed funds rate too high for too long or in the unlikely event the economy becomes too hot to handle. Other drivers can be rising energy prices keeping inflation elevated while hurting economic activity or a financial of geopolitical crisis erupts. Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold while wondering whether the yellow metal in the short-term will continue to be able to withstand additional yield and dollar strength. The timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action. Spot gold, in a downward trending channel since May, is currently stuck in a $1900 to $1950 range with additional dollars and yield strength raising the risk of a short-term break below which may see $1885 being challenged. A close back above the 200-day moving average, last at $1927, is likely to coincide with a break of the mention downtrend, opening for a fresh attempt to challenge resistance in the $1950 area.  
Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Saxo Bank Saxo Bank 26.09.2023 15:25
Asian stocks fell with US futures as yields on 10-year Treasuries reach a 16-year high above 4.54% while China Evergrande Group missed a debt payment adding to fears about the sectors massive debt pile. Broad dollar strength continues with the greenback trading at its highest level since December as another Fed member said another rate hike this year will be needed. Crude oil trades softer amid macroeconomic concerns and a stretched speculative long while gold holds support despite multiple headwinds. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: S&P 500 futures are under pressure this morning with the US 10-year yield hitting 4.55% extending its relentless move higher. If the US 10-year yield moves to 4.75% we will most likely begin seeing widening cracks in equities as the prevailing narrative of falling inflation collapses. Yesterday’s session saw no meaningful rotation between defensive and cyclical sectors. Today’s key events are US consumer confidence figures and Costco earnings tonight after the market close. FX: Higher Treasury yields, particularly in the long end, pushed the dollar higher to extend its gains. USDCHF rose to near 4-month highs of 0.9136 with immediate target at 0.9162 which is 0.382 retracement level. EURUSD broke below 1.06 support despite better-than-expected German Ifo. USDJPY attempted a move towards 149 with verbal intervention remaining lacklustre. AUD slipped on China woes while NZD and CAD were relative gainers, and the outperformer was SEK with the Riksbank starting its FX hedging today. Commodities: Crude trades lower for a second day with macroeconomic concerns, a stronger dollar and a stretched speculative long and easing refinery margin weighing on prices. Gold prices continue to defy gravity, holding above $1900 support with demand for stagflation protection offsetting the current yield and dollar surge. LME copper is trading at the widest contango (oversupply) since at least 1994 as inventories expand and China demand concerns persist. Wheat continues to face downward pressure from huge Russian harvest despite weather related downgrades in Australia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening, and waning foreign investors demand, it’s likely to see yields continue to rise until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data while the US Treasury will sell 2-, 5- and 7-year notes. It will be interesting to see if investors buy the belly of the yield curve as a sign that they are preparing for a bull rather than a bear-steepening. Overall, we continue to favour short-term maturities and quality. Volatility: VIX Index still sits at around the 17 level, but the downward pressure in equity futures this morning could push the VIX much higher. This could be a cycle where the market tests the 20 level. Macro: Fed’s Goolsbee (voter) kept the door open for more rate hikes while emphasizing higher-for-longer. Moody’s warned of a protracted government shutdown saying that it could weigh on consumer confidence and markets. Meanwhile, after PMIs, Germany’s Ifo also showed a slight improvement in business outlook to 85.7 vs. 85.2 expected, while the previous was revised higher to 85.8. There were several ECB speakers once again. Lagarde largely repeated what was said at the ECB Press Conference, noting policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. Schnabel said there is not yet an all-clear for the inflation problem. In the news: Interest rates will stay high 'as long as necessary,' the European Central Bank's leader says (Quartz), Teetering China Property Giants Undercut Xi’s Revival Push (Bloomberg), Russia dodges G7 price cap sanctions on most of its oil exports (FT), Global trade falls at fastest pace since pandemic (FT), Dimon Warns World Not Ready for 7% Fed Rate: Times of India via Bloomberg Technical analysis: S&P500 downtrend support at 4,328 & 4,200. Nasdaq 100 support at 14,687 &14,254. DAX downtrend support at 14,933. EURUSD below strong support, resuming downtrend to 1.05. GBPUSD downtrend strong support at 1.2175. Gold rangebound 1,900-1,950. Crude oil correction: WTI expect to 87.58. Brent to 80.62. US 10-year T-yields 4.55, uptrend but expect minor correction Macro events: US New Home Sales (Aug) exp 699k vs 714k prior (1400 GMT), US Consumer Confidence (Sep) exp 105.5 vs 106.1 prior. Speeches from Fed’s Bowman (voter) as well as ECB’s Lane, Simkus and Muller. Earnings events: Costco reports FY23 Q4 earnings (aft-mkt) today with estimated revenue growth of 8% y/y and EPS growth of 14% y/y. H&M reports FY23 Q3 earnings (bef-mkt) with estimated revenue growth of 7% y/y and EPS growth of 47% y/y. Micron Technology reports FY23 Q4 earnings (aft-mkt) with estimated revenue growth of -41% y/y and EPS of $-1.18 vs $1.37 a year ago. Accenture reports FY23 Q4 earnings (bef-mkt) with estimated revenue growth of 4% y/y and EPS unchanged from a year ago. Nike reports FY24 Q1 earnings (aft-mkt) with estimated revenue growth of 3% y/y and EPS growth of –20% y/y.
The British Pound Faces Further Breakdown Amidst Dollar Strength and Government Shutdown Risks

The British Pound Faces Further Breakdown Amidst Dollar Strength and Government Shutdown Risks

Kenny Fisher Kenny Fisher 27.09.2023 13:41
UK Mortgage approvals expected to continue to drop No major revisions expected with Q2 GDP report BOE overnight index swaps price in a peak rate of 5.369% at the Feb 1st meeting US Government Shutdown risk remains as Senate negotiators propose stopgap solution The British pound looks like it is heading for a further breakdown as dollar strength appears to be resuming.  Technical traders trying to find a bottom are getting frustrated as oversold conditions deepen and on doubts that a DeMark Buy countdown might yield a meaningful rebound.  The bearish trend has steadily broken below several key technical levels and weekly support from 1.2114 seems to be the next target.         The recent surge with the dollar was also supported by safe-haven flows from rising American government shutdown fears, so a potential stopgap solution could allow for the dollar rally to pause.  After the NY close a tentative proposal between Senate Republicans and Democrats would keep agencies functioning through mid-November. The potential solution fund federal agencies at current levels for another 45 days, with little support given towards Ukraine or disaster relief.  It isn’t clear if they have enough votes to avert an October 1st showdown, but momentum is growing for a band-aid solution. If risk aversion remains the dominant theme of the week, it will be hard for the British pound to find key support.  Unless Treasury yields tumble and disinflation signs grow, short-term dollar strength seems likely.    
Gold's Hedge Appeal Shines Amid Economic Uncertainty and Fed's Soft-Landing Challenge

Gold's Hedge Appeal Shines Amid Economic Uncertainty and Fed's Soft-Landing Challenge

InstaForex Analysis InstaForex Analysis 27.09.2023 15:04
As mentioned in previous updates, the reason why gold in our opinion has been holding up well despite the mentioned headwinds, is likely to be a market in search for a hedge against the current negative market sentiment and most importantly, the FOMC failing to deliver a soft, as opposed to a hard landing. A hard landing or stagflation may occur if the Fed keeps the Fed funds rate too high for too long or in the unlikely event the economy becomes too hot to handle. Other drivers can be rising energy prices keeping inflation elevated while hurting economic activity or a financial of geopolitical crisis erupts. Demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold while wondering whether the yellow metal in the short-term will continue to be able to withstand additional yield and dollar strength. The timing for a fresh push to the upside will remain very US economic data dependent as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action. Spot gold, in a downward trending channel since May, is currently stuck in a $1900 to $1950 range with additional dollars and yield strength raising the risk of a short-term break below which may see $1885 being challenged. A close back above the 200-day moving average, last at $1927, is likely to coincide with a break of the mention downtrend, opening for a fresh attempt to challenge resistance in the $1950 area.  
FX Daily: Resuming the Norm – Dollar Gains Momentum as Quarter-End Flows Fade

FX Daily: Resuming the Norm – Dollar Gains Momentum as Quarter-End Flows Fade

ING Economics ING Economics 05.10.2023 08:36
FX Daily: Back to the status quo The quarter-end flows effect has faded. Markets are steadily back on a short-bond/long-dollar track, helped by an improvement in US ISM manufacturing and hawkish Fed comments. EUR/USD and GBP/USD look on track to test the 1.0400 and 1.2000 support levels. Meanwhile, the RBA's new governor sent a message of continuity and added pressure on AUD.   USD: Reclaiming the crown We had pointed at quarter-end flows as the likely cause for dollar weakness into the end of last week, and yesterday’s price action set markets back on the short-bonds/long-USD track that has been the norm since mid-July. Two factors have helped this narrative re-consolidate along with the quarter-end effects fading: an improving ISM manufacturing and hawkish Fedspeak. US September ISM manufacturing beat expectations yesterday, climbing to 49.0 from 47.6. S&P Global Manufacturing PMIs for September were also revised higher to 49.8. As discussed in this note, this is the 11th consecutive ISM manufacturing read in contractionary territory (sub-50). Still, the improvement to the 49.0 level and the close correlation with GDP means we might see a very respectable 4.0% annualised growth print for the third quarter. That would surely boost the Federal Reserve's soft-landing view for the economy. In the past few days, we have also heard FOMC hawks becoming increasingly vocal about the prospect of more rate hikes in what appeared to be a 'rate protest', with markets only pricing in a 50% implied probability of another rate increase to a peak despite that being part of the dot plot projections. Loretta Mester hit the headlines with a call for another hike this year, following Michelle Bowman’s suggestion that multiple hikes are still needed. Michael Barr struck a more moderate tone but did not rule out another hike. The USD 2-year swap rate climbed back above 5.0% yesterday, which might now work as a floor with the Fed sending hawkish messages and barring a turn for the worst in US data in the near term. The residual gap between the dot plot projections and market pricing for 2023 and 2024 also indicates good chances that USD short-term rates can build some support. Expect markets to focus primarily on August JOLTS job openings figures today, the only highlight in the US data calendar. Raphael Bostic – a fairly dovish voice as of late – is the only scheduled Fed speaker. Volatility in back-end yields should continue to determine the direction of FX moves. Another bearish leg to 4.75%+ in US 10-year bonds can probably keep DXY on track to hit 108.00 in the near future.    
Continued Growth: Optimistic Outlook for the Polish Economy in 2024

EUR/USD Stagnant Despite ECB Meeting and US GDP: Analyzing Market Perceptions

InstaForex Analysis InstaForex Analysis 27.10.2023 15:23
The currency pair EUR/USD showed absolutely no movements on Thursday—no reaction to important events. In our previous articles, we've already mentioned that people can have different opinions about what happened yesterday. On one hand, it's not uncommon to see meetings where no significant decisions are made, but the pair starts moving in different directions afterward. On the other hand, there were no significant decisions made yesterday, and Christine Lagarde's rhetoric was maximally bland and uninteresting. Therefore, the market had nothing to react to, and it all seems logical. However, this week, there is very little logic in the pair's movements. On Monday and Tuesday, there were movements of such strength that it feels like the ECB meeting actually happened on Monday, not on Thursday. In other words, the market considered business activity indices much more important than the ECB meeting and the US GDP report. The technical picture over the past day, of course, has not changed. How could it change when there were essentially no movements? The price is once again below the moving average, but that doesn't stop it from resuming its rise today and forming a third corrective wave. The fact that we didn't see further depreciation of the pair on strong statistics from across the ocean could indicate the market's mood for a new corrective wave. However, we want to note that the current area where the pair is located is quite dangerous for traders. Both buy and sell signals are forming in this area. The pair seems like it should be falling, but it may correct a bit more. On the 24-hour time frame, the price is "dancing" around the important level of 1.0609 and the critical line. On the 4-hour time frame, it crosses the moving average about once a day. All of this just confuses traders. The ECB didn't evoke any emotions in the market. In principle, there was no intrigue regarding the ECB meeting.     Market participants were 100% sure that the key rate wouldn't change, and therefore, the other two rates wouldn't change either. Expecting strong statements from Christine Lagarde, who spoke twice this week, was very difficult. What could Lagarde say? "We are tightening monetary policy again!"? Or "We are lowering the key rate!"? Neither the first nor the second option had anything to do with reality. In the end, Ms. Lagarde stated that "rate cuts were not discussed at the meeting," and in the future, rate decisions will be made based on incoming information. The ECB will continue to closely monitor GDP, inflation, and core inflation indicators and regularly assess the impact of current monetary measures on the economy. In essence, we didn't hear anything new. The market already knew all of Lagarde's statements by heart. And the statement about not considering rate cuts sounds like mockery. How can there be any easing when inflation exceeds the target level by more than double? As for the market's reaction, it could have provided insights into how the market perceives the received information. However, the reaction was practically non-existent, so we can't draw any conclusions here either. We believe that the strengthening of the dollar will continue in the medium term, especially after yesterday's strong package of statistics from across the ocean. We believe that the Federal Reserve has a much better chance and real opportunities to raise rates one or two more times than the ECB. Perhaps the market is not yet ready to resume selling the pair, and it may require one or even two more correction cycles, but we don't even consider the scenario of a new upward trend at the moment. We expect the dollar to rise to 1.0200. Read more: https://www.instaforex.eu/forex_analysis/358692
Continued Growth: Optimistic Outlook for the Polish Economy in 2024

FX Markets in Flux: Navigating Fed Commentary and Global Economic Signals

ING Economics ING Economics 07.11.2023 15:51
FX Daily: Waiting for the Fed pushback FX markets are consolidating after a few risk-on days. We have seen some strange price action on the back of the RBA's 25bp hike and some mixed Chinese data. For today, it looks like a relatively quiet session, although the focus will be on how aggressively the line-up of Fed speakers wants to push back against the recent weakening of US financial conditions.   USD: Fed speakers will be in focus today FX markets have handed back a little more of their risk-on gains overnight, leaving the dollar marginally stronger. However, US ten-year Treasury yields are still down at 4.65% and last night's release of the Fed's Senior Loan Officers Survey serves as a reminder that credit conditions are tightening and lending growth is weakening – both of which are likely to weigh on the US economy over coming quarters. In quiet overnight developments, what stands out is the strange reaction in AUD/USD to the Reserve Bank of Australia's 25bp hike. The poor performance of AUD/USD may owe to positioning, or perhaps some read that if the RBA needs to restart its tightening cycle after a four-month pause, maybe the Fed does too. Yet, US rates have not moved much, and the Australian dollar also failed to gain ground on slightly better-than-expected Chinese import data. Perhaps the read here is that the market needs a lot more evidence before pushing on with the Fed pause/peak and weaker dollar scenario. Today, the US highlight will be Federal Reserve speakers, which run from 1:30 pm CET for most of the day. At issue will be whether the Fed chooses to push back against the loosening of US financial conditions. Recall that the tightening of financial conditions in mid-October prompted remarks such as the 'term premium is doing the tightening'. Now that these financial conditions have fully reversed that October spike, the Fed will presumably want to re-emphasise the risk of further rate hikes.  Risks look skewed to a mildly stronger dollar today. DXY closing above 105.50 undoes some of last week's bearish work. But from where we stand, it looks like DXY might bounce around in a broad 104.50-106.50 range into year-end.
EUR/USD Rejected at 1.1000: Anticipating Rangebound Trading and Assessing ECB Dovish Bets

US Dollar Rises as Bond Market Ignites: A Look at Dollar's Resurgence

ING Economics ING Economics 10.11.2023 10:03
FX Daily: Bond bears give new energy to the dollar A very soft 30-year Treasury auction and hawkish comments by Powell triggered a rebound in US yields and the dollar yesterday. Dynamics in the rates market will remain key while awaiting market-moving US data. In the UK, growth numbers in line with expectations, while in Norway, inflation surprised to the upside. USD: Auction and Powell trigger dollar rebound The dollar chased the spike in US yields yesterday following a big tailing in the 30-year Treasury auction and hawkish comments by Fed Chair Jerome Powell. Speaking at the IMF conference, Powell warned against reading too much into the softer inflation figures and cautioned that the inflation battle remains long, with another hike still possible. If we look at the Fed Funds future curve, it is clear that markets remain highly doubtful another hike will be delivered at all, but Powell’s remarks probably represent the culmination of a pushback against the recent dovish repricing. Remember that in last week’s FOMC announcement, the admission that financial conditions had tightened came with the caveat that the impact on the economy and inflation would have depended on how long rates would have been kept elevated. The hawkish rhetoric pushed by Powell suggests that the Fed still prefers higher Treasury yields doing the tightening rather than hiking again, and that is exactly what markets are interpreting. The soft auction for long-dated Treasuries also signals the post-NFP correction in rates may well have been overdone and could set a new floor for yields unless data point to a worsening US outlook. Today’s highlights in the US calendar are the University of Michigan surveys. Particular focus will be on the 1-year inflation gauge, which is expected to fall from 4.2% to 4.0%. On the Fed side, we’ll hear from Lorie Logan, Raphael Bostic and Mary Daly. Dynamics across the US yield curve will have a big say in whether the dollar can hold on to its new gains. Anyway, we had called for a recovery in DXY to 106.00 as the Fed would have likely pushed back against the dovish repricing. The rebound in yields should put a floor under the dollar, but we suspect some reassurances from the data side will be needed for another big jump in the greenback.
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

GBP/USD Outlook: Navigating Chaotic Year-End Movements and Anticipating Potential Trends

InstaForex Analysis InstaForex Analysis 02.01.2024 14:15
GBP/USD exhibited quite chaotic movements during the last trading day of the previous week, month, and year. The price constantly changed direction, but at the end of the day, it stayed above the trendline that has suggested an uptrend for the past couple of months. Therefore, the pair could resume its upward movement as early as Tuesday.   However, at the same time, the euro has settled below the trendline, indicating a good chance for a downward move. Take note that the euro and the pound often (almost always) trade in the same direction. Therefore, it wouldn't be surprising if the pound also settles below the trendline today. This would open up possibilities for the pound to fall towards the Senkou Span B line. Of course, any downward movement can easily come to an end near this line since the dollar is still weak, and market participants are not eager to buy it. However, this week will bring plenty of important information from the U.S., and if it turns out to be positive, the dollar could significantly strengthen its positions, especially amid a three-month decline and oversold conditions. Therefore, we believe that the pair could potentially start a downward movement as early as tomorrow, which we could work with. The main condition is for the pair to breach the trendline. Speaking of trading signals, there were quite a few on Friday, but volatility was weak, and the movements were chaotic. On the last day of the year, hardly anyone wanted to enter the market, especially since last week's movements were absolutely unpredictable. Therefore, we believe that the year has ended and it's best to leave it in the past.  
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

ING Economics ING Economics 26.01.2024 14:21
Federal Reserve to downplay chances of imminent action while holding rates steady The dovish shift in Fed forecasts in December – with three rate cuts pencilled in for 2024 – incentivised the market to push even more aggressively in pricing cuts. However, they appear to have gone too far too fast for the Fed’s liking, even though inflation is almost back to target.   Expect more pushback against a March rate cut The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% next Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening – allowing $60bn of maturing Treasuries and $35bn of agency mortgage backed securities to run off its balance sheet each month.  At the December Federal Open Market Committee meeting there was undoubtedly a dovish shift. We got an acknowledgement that growth "has slowed from its strong pace in the third quarter" plus a recognition that "inflation has eased over the past year". With policy regarded as being in restrictive territory, the updated dot plot of individual forecasts indicated the committee was coalescing around the view that it would likely end up cutting the policy rate by 75bp this year.  This was interpreted by markets as giving them the green light to push on more aggressively. Given the Fed’s perceived conservative nature the risks were skewed towards them eventually implementing even more than it was publicly suggesting. At one point seven 25bp moves were being priced by markets with the first cut coming in March. A March interest rate cut looked too soon to us given strong growth and the tight jobs market, so the recent Fed official commentary downplaying the chances of an imminent move hasn’t come as a surprise. Markets are now pricing just a 50% chance of such a move with nothing priced for the 31 January FOMC.   Fed funds target rate (%) and the period of time between the last rate hike and first rate cut in a cycle   But the statement will shift to neutral In terms of the accompanying statement we do expect further changes. The December FOMC text added the word “any” to the sentence “in determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time”, offering a clear hint that that interest rates have peaked. The commentary ahead of the blackout period had suggested the Fed saw no imminent need for a rate cut, so we expect it to continue to push back against an early move, but continuing talk of rate hikes in the press statement is not going to look particularly credible to markets. The Fed could choose to go back to its previous stock phraseology (used in January 2019 when it held policy steady after it had hiked rates one last time in December 2018) that “in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective”.   And rate cuts are coming... Despite this, we believe the Fed will end up delivering substantial interest rate cuts. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weighs on activity and Covid-era accrued household savings provide less support. Inflation pressures are subsiding with the quarter-on-quarter annualised core personal consumer expenditure deflator effectively saying 'job done' after two consecutive quarters of 2% prints. The Fed’s current view is that the neutral Fed funds rate is 2.5%, signalling scope for 300bp of rate cuts just to get us to 'neutral' policy rates. Moreover, the 'real' policy rate, adjusted for inflation, will continue to rise as inflation moderates. We believe the Fed will choose to wait until May to make the first move, with ongoing subdued core inflation measures giving it the confidence to cut the policy rate down to 4% by the end of this year versus the 4.5% consensus forecast, and 3% by mid-2025. This will merely get us close to neutral territory. If the economy does enter a more troubled period and the Fed needs to move into 'stimulative' territory there is scope for much deeper cuts.   The Fed is knee-deep in technical adjustments, and there's likely more to come on the QT front One item has already been dealt with ahead of the FOMC meeting – the end of the Bank Term Funding facility. See more on that here. One of the takeaways is the notion that the Fed is comfortable with the system. That at least sends a comfort signal to the market. In that vein, the Fed ignited an accelerated discussion on potential tapering of the its quantitative tightening (QT) agenda ahead. Currently the Fed is allowing some $95bn of bonds to roll off its balance sheet on a monthly basis. So far this has not pressured bank reserves, which are in the $3.5bn area. The Fed has been quoted as viewing this as comfortable, with the implication that they can fall, but not by too much. The 10% of GDP back-of-the-envelope target would be in the area of $3tn. Most of the pressure from QT programme is being felt through lower reverse repo balances going back to the Fed on the overnight basis. Ongoing balances there are running at around $550bn, down by some $1.8tn since March 2023. That pace of fall is in excess of the monthly pace of QT. The residual is accounted for by a rise in the US Treasury cash balances at the Fed. Bottom line, there are two sources of comfort here. First, room from the reverse repo balance of $550bn. That can get to zero without a material impact on bank reserves. Second, the fact that bank reserves themselves have a $500bn comfort factor between $3.5tn now to the $3tn area neutral. There is no urgency for Fed to set a plan in place, but it seems they want to get cracking on it. It’s likely the Fed formulates a plan to slow the pace of QT over the second half of the year, as by mid-year we expect to see the reverse repo balances pretty close to zero. Maybe cut it by a third for starters. We’d then be on a glide path over the second half of 2024 where bank reserves would begin to ease lower. We’d then expect QT to have concluded by year-end. Over to the Fed to see how they deal with it.   Dollar bears require patience We feel it is a little too early for the Fed to pump more air into the easing narrative and would probably prefer to let the data do the talking. However, the conviction is there in markets that the Fed and other major central banks will be in a position to cut later this year. This suggests that the dollar does not have to rally too far on any Fed remarks seen as less than dovish. For the time being we see no reason to argue with seasonal factors which normally keep the dollar strong through the early months of the year. We retain a 1.08 EUR/USD target for the end of the first quarter, but expect a clearer upside path to develop through the second quarter once the first Fed cut looks imminent.   

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