hawkish comments

Fed likely to skip, but it's going to be close Market pricing has shifted massively over recent weeks, but we think the most likely outcome remains the Fed leaving policy rates unchanged on 14 June. There will be some dissent and a shock inflation reading could make it a very close decision. Either way, the Fed will leave the door open to further rate moves.   No change the most likely outcome Just over a month ago, Federal Reserve Chair Jerome Powell hinted that after 500bp of rate hikes over a 14 month period, interest rates may finally have entered restrictive territory and the Fed could pause at the June meeting to take some time to evaluate the effects. Markets took this as a signal that we may already be at the peak with the fear that the combination of high borrowing costs and tighter lending conditions could prompt a recession with inflation falling swiftly back towards target. On 4 May, Fed funds futures contracts were pricing in 86bp of interest rate cuts by year end and the target range heading below 4% at the January 2024 FOMC meeting.   Over the subsequent six weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. Hawkish comments from a few Fed officials have added to the sense that they may not be done. The result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10bp priced) and July is looking a decent bet for a hike (21bp priced). Next Tuesday’s CPI report could see pricing move even further in favour of a hike – currently the consensus is for core CPI to come in at 0.4% month-on-month, but if we get a shock 0.5% that could be sufficient to convince enough FOMC members to vote for a hike.   That’s not our base case and we believe there will be a majority on the committee who think they have tightened policy a lot and it makes sense to wait. This was certainly the commentary from senior Fed officials such as Governor Philip Jefferson and Philadelphia Fed Governor Patrick Harker, that while “there is still significant room for improvement” the Fed is “close to the point where we can hold rates in place and let monetary policy do its work”. Moreover, recent data releases have been sending very mixed messages, which suggests it may make sense pause to evaluate.   Conflicting data makes life hard for the Fed Friday’s Labour report is a notable example. The establishment survey, which questions employers and generates the non-farm payrolls number, reported a jump of 339,000 in employment in May. However, the household survey, used to calculate the unemployment rate, showed employment declined 310,000 with unemployment rising 440,000. Then we have the manufacturing ISM reporting a rise in its employment survey yet the payrolls report stated there was a 2000 decline. Meanwhile, service sector payrolls rose 257,000 yet the ISM services employment index fell into contraction territory.   We see similar mixed messages within the GDP report. On an expenditure basis, GDP grew 1.3% annualised in 1Q 2023 and 2.6% in 4Q 2022. However, an alternative measure of US economic activity, Gross Domestic Income, which combines all the costs incurred and incomes earned in the production of GDP, contracted 2.3% annualised in 1Q 2023 after a 3.3% drop in 4Q 2022 and has declined in three out of the past four quarters. An average of the two series suggests the economy has flatlined since 3Q 2022.   Fed to leave the door open for further hikes Nonetheless, the Fed wants to see 0.2% month-on-month or below CPI readings to be confident inflation will return to 2%. We aren’t there yet so if they do hold rates steady, as we predict, it is likely to be a hawkish hold with the door left open to further rate hikes if inflation doesn’t slow – July is clearly a risk. We certainly acknowledge the risk that they hike rates 25bp, especially if Tuesday’s inflation data surprises to the upside, but doubt they will intensify the language on rate hikes so the “hawkish hike” scenario in the table above looks unlikely.

The Commodities Feed: Oil dips following hawkish comments from Fed Chair Powell The oil market has been unable to escape the pressure from a more hawkish Federal Reserve. And this is despite a supportive inventory report from the Energy Information Administration (EIA)   Energy – Fed talk pressures the energy complex The oil market buckled yesterday as a result of further hawkish comments from Federal Reserve Chair Jerome Powell during his second day of congressional testimony. ICE Brent fell almost 3.9% on the day towards US$74/bbl. And this weakness has continued this morning. A more hawkish Fed overshadowed what was a fairly constructive EIA report. US commercial crude oil inventories fell by 3.38MMbbls over the last week, more than the 1.2MMbbls draw the American Petroleum Institute (API) reported the previous day and more than the market was expecting. Crude oil exports played a part in this draw, rising by 1.27MMbbls/d WoW to 4.54MMbbls/d. On the product side, small builds of 479Mbbls and 434Mbbls were seen in gasoline and distillate fuel oil respectively. In addition, implied US oil demand (total product supplied) hit 20.93MMbbls/d over the week – the highest number seen since December. Middle distillates remain well supported with the prompt ICE gasoil crack remaining above US$20/bbl, whilst the prompt time spread remains in deep backwardation. The latest data from Insights Global show that gasoil inventories in the Amsterdam-Rotterdam-Antwerp (ARA) region continue to decline with them now standing at 2.04mt, which is below the five-year average and levels not seen since the start of the year. Refinery outages appear to be driving this tightness, which should continue to support middle distillates at least in the short term. There is very little on the calendar today for energy markets. Baker Hughes will release rig count data and if it continues to follow the trend seen so far this year, we can expect a further decline in drilling activity. Higher costs have likely contributed to slower drilling activity. The latest Dallas Fed Energy Survey shows that 60% of producers see drilling and completion costs per well to end this year higher than where they ended 2022. Today's other regular release on the calendar is the latest positioning data from the Commodity Futures Trading Commission (CFTC) and ICE. Given the move in the oil market over the last reporting week and the increase in open interest, we could see the net speculative long in ICE Brent having grown over the week. This is even more the case for ICE gasoil, where open interest has increased from a little under 706k lots to more than 720k lots over the reporting week.  

EUR: Hawkish comments in Sintra expected Evidence of a deteriorating economic outlook in the eurozone appears to be mounting. Yesterday’s IFO survey in Germany came in on the weak side, with the Business Climate index falling more than expected from 91.5 to 88.5 and the expectations gauge from 88.3 to 83.6. The Current Assessment indicator matched expectations, but still declined in June from 94.8 to 93.5. When adding other forward-looking business surveys (PMIs, ZEW) the case for a negative re-rating of the eurozone growth outlook is clearly strengthening. The euro’s null reaction to yesterday’s IFO was likely due to the rather pronounced post-PMI drop on Friday: in a way, the IFO merely confirmed what PMIs had already flagged last week. Most importantly, the ECB has appeared primarily focused on inflation concerns as opposed to the growth discussion. Sintra was the stage for pivots in the monetary policy message in past editions, but this year, the message may be a reiteration of the hawkish tone we heard after the latest policy meeting: a hike in July is necessary, one in September is up for debate. President Christine Lagarde delivers her introductory speech this morning, and then we’ll hear from Panetta (a dove) and Schnabel (a hawk). Ultimately, EUR/USD may not be trading far from 1.0900 at the end of the Sintra summit. We’ll also be paying attention to Norges Bank Governor Ida Wolden Bache’s speech today in Sintra. NOK has faced huge volatility after the larger-than-expected 50bp hike by Norges Bank last Thursday, with the initial rally proving very short-lived and the krone plunging on Friday. EUR/NOK is now back below 11.70, but we may still hear some attempts to propel the currency higher from the governor.  

GBP: No pushback against aggressive expectations Sintra is an important event for sterling as well. While tomorrow’s speech by Bank of England Governor Andrew Bailey is the most awaited event, today’s speech is by the two most dovish voices in the MPC: Silvana Tenreyro and Swati Dhingra. The former will be replaced in the committee by Megan Greene on 5 July and her remarks should have reduced market impact, while any hawkish comments by Dhingra may be read as a de-facto endorsement of the market’s aggressive tightening expectations. The Sonia curve is pricing in a 6.15-6.20% peak rate as of this morning around the turn of the year, and keeping the option of a 50bp hike in August very much on the table (44bp priced in). Data may argue against such aggressive action down the road, but the majority of Bank of England officials look unlikely to vehemently push back against tightening expectations for now. EUR/GBP does not have huge downside room, but a rebound to 0.88 will likely be very gradual.

JPY: Any surprises, Mr. Ueda? A packed agenda of central bank speakers in Sintra today includes Bank of Japan Governor Kazuo Ueda, who will join the policy panel with Lagarde, Powell and Bailey. The speech will come at a time when the market’s focus on the yen is on the rise again: USD/JPY traded above 144.00 yesterday, and is rapidly approaching the 145 area which is seen as a potential line in the sand for FX intervention by Japanese authorities. Overnight, Japan’s top currency official, Masato Kanda, stepped in with a verbal “protest”, saying that authorities are ready to intervene if there are excessive FX moves, but USD/JPY is facing fresh upward pressure this morning and today, hawkish comments by Powell, backed by the solid US data seen so far this week, could easily take the pair closer to 145.00. There is a possibility that Ueda will use Sintra as a stage to try and offer some verbal support to the yen, although the sustainability of that as a supporting narrative for the yen is up for debate. Any hawkish tilt in Ueda’s resolutely loose policy stance would surely have a more far-reaching impact on the currency: we do not exclude that this could happen at the July BoJ meeting, but is Ueda ready to tweak his narrative today? The probability is arguably pretty low, but with very little priced in, the bar for any hawkish surprise is also quite low.

The test of 1.0912, coinciding with the significant rise of the MACD line from zero, limited the upward potential of the pair.   Pressure may return in the pair, following strong labor market data from the US. A decrease in the number of jobless claims will likely fuel dollar demand, along with revised data on 1st quarter GDP. A speech from FOMC member Raphael Bostic also lies ahead, and this will advocate aggressive rate hikes in the near future. After all, many Fed members believe that the US economy copes well with the current high cost of borrowing.   For long positions: Buy when euro hits 1.0942 (green line on the chart) and take profit at the price of 1.0976. Growth will only be possible after weak labor market data from the US. However, before buying, traders should make sure that the MACD line lies above zero or rises from it. Euro can also be bought after two consecutive price tests of 1.0920, but the MACD line should be in the oversold area as only by that will the market reverse to 1.0942 and 1.0976.   For short positions: Sell when euro reaches 1.0920 (red line on the chart) and take profit at the price of 1.0887. Pressure will return in the case of hawkish comments from Fed representatives and strong labor market statistics. However, before selling, traders should make sure that the MACD line lies below zero or drops down from it. Euro can also be sold after two consecutive price tests of 1.0942, but the MACD line should be in the overbought area as only by that will the market reverse to 1.0920 and 1.0887.   What's on the chart: Thin green line - entry price at which you can buy EUR/USD Thick green line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further growth above this level is unlikely. Thin red line - entry price at which you can sell EUR/USD Thick red line - estimated price where you can set Take-Profit (TP) or manually fix profits, as further decline below this level is unlikely. MACD line- it is important to be guided by overbought and oversold areas when entering the market   Important: Novice traders need to be very careful when making decisions about entering the market. Before the release of important reports, it is best to stay out of the market to avoid being caught in sharp fluctuations in the rate. If you decide to trade during the release of news, then always place stop orders to minimize losses. Without placing stop orders, you can very quickly lose your entire deposit, especially if you do not use money management and trade large volumes. And remember that for successful trading, you need to have a clear trading plan. Spontaneous trading decision based on the current market situation is an inherently losing strategy for an intraday trader.

FX Daily: Quiet start to an intense week The Independence Day holiday in the US means the week should start quietly in markets, but US data will soon attract the market's attention again now that a July Fed rate hike is a consensus view and there is also speculation about a move in September. We think the dollar can find some support this week. In the CEE region, central banks in Romania and Poland meet.   USD: Data in focus amid thin holiday volumes The month of June saw the dollar weaken against all G10 currencies except for the Japanese yen, but the greenback has been quite supported in the past few days. Some hawkish comments by Federal Reserve Chair Jay Powell at the Sintra central bank symposium last week have helped markets to close the gap with the FOMC’s dot plot projections: the Fed funds futures curve currently prices in 34bp of tightening to the peak, a 10bp increase compared to a week ago. Crucially, markets are now actively considering the option of two rate hikes. This week should start quite quietly with the Independence Day holiday meaning US markets should have reduced flows until tomorrow. Still, US data activity will peak as markets assess the probability of a September hike now that a July increase appears to be the consensus view. Today, all eyes will be on the ISM manufacturing index, although a greater focus will be on the services survey released on Thursday (the May print dropped more than expected). On Friday, jobs figures for the month of June will be published: after the latest comments by Powell, it will probably take a very weak reading to put a July hike under discussion. On the Fed side, the first event to note is on Wednesday, when the June FOMC minutes are released. The dollar can probably find some more support this week as markets see more reasons in the data and the minutes to gradually align with the more hawkish dot plot projections.

The latest report on the US consumer price index reveals a slowdown in inflation, with an annual rate of 3.0% in June compared to 4.0% the previous month. This figure, slightly below the expected 3.1%, indicates a moderation in price growth. Core inflation also decelerated to 4.8% from 5.3%, falling in line with expectations. Surprisingly, this marks the ninth consecutive report where indicators have either met or fallen short of expectations, sparking a distinct market reaction. Notably, the response from the market differs this time around, as confidence grows and risk appetite increases, leading to a decline in the value of the US dollar. The latest report has fueled speculation that the Federal Reserve (Fed) may deviate from its planned two rate hikes this year or consider an expedited shift towards policy easing in the upcoming year.   US inflation slows, but Fed has the last word The US consumer price index slowed to an annual rate of 3.0% in June from 4.0% the previous month. This was slightly below the expected 3.1%. Core inflation slowed to 4.8% from 5.3%, and 5.0% expected. This is the ninth consecutive report where an indicator has been in line or weaker than expected, but we see a different market reaction.       This time the markets are confident, risk appetite is rising, and the dollar is falling as the latest report has fuelled speculation that the Fed will not need to stick to its plan of two rate hikes this year or will allow for a quicker reversal to policy easing next year. While the Fed is often wrong in its forecasts, it is still the Fed that has the final say on interest rate decisions. Despite the constant inflation surprises, FOMC members remain hawkish in their comments, regularly pointing out that the fight against inflation is not over.     After the latest inflation report, the dollar index was close to its lowest level since April 2022, losing more than 12% from its peak last September. This decline creates additional pro-inflationary pressure, unlikely to please the central bank. Traders' and investors' attention should now turn to the Federal Reserve's assessment of the latest data. In addition to the speeches by Barkin, Kashkari and Bostic, the Fed's Beige Book will be released today, which will be used as the basis for the Fed's observations at the July meeting.    

EUR: Surprisingly resilient After a week that has brought to the table some serious concerns about China’s near and medium-term outlook, it is quite a success for EUR/USD to be trading around 1.0900. The pair is not just exposed to Chinese sentiment via the risk-environment channel, but more directly given the eurozone’s economic exposure to China. The question now remains: will the Chinese story catch up with the euro? For now, it really appears that markets are welcoming Beijing’s forceful reaction, although much will probably depend on the developments in the distressed shadow bank Zhongzhi and the actual depth of the real estate slump. All in all, it does look like there is a path for the euro and other pro-cyclical currencies to weather this Chinese turmoil without taking much damage, but that also means a delay in any substantial rally against the dollar. Data-wise, we’ll take a look at the final inflation figures in the eurozone today. Markets are currently pricing in a 50% implied probability of a European Central Bank (ECB) rate hike in September, and have marginally scaled back expectations along the curve in the past few days. A full rate hike is not priced before the end of the year, which probably leaves some upside room for short-term rates in the eurozone should ECB officials come back after the summer holidays with some hawkish comments. EUR/USD may keep trading in narrow ranges for now, with a modestly bearish bias to the 1.0850 level.  

GBP: Light calendar this week The pound has started the week modestly stronger, partly helped by some hawkish comments over the week at Jackson Hole by Bank of England Deputy Governor Ben Broadbent, who stressed that inflation is unlikely to slow down as fast as it emerged and that monetary policy will need to remain in restrictive territory for some time. Aside from that, the pound is being helped by a tentative risk-on/dollar-off as London markets re-open after yesterday’s UK national holiday. This week’s calendar in the UK is quite light, meaning that GBP will likely continue to be driven primarily by external factors. One event to keep an eye on is a speech by BoE Chief Economist Huw Pill on Thursday. Cable could find support if we are right to think markets may scale back some bullish dollar positions before having confirmations from US payrolls. When it comes to EUR/GBP, it will be all about the EUR leg and the eurozone’s inflation numbers this week. In line with our bullish euro call, we see a break above 0.8600 as very feasible.

The CFTC report published on Friday showed that long-term investors are bullish on the dollar. The weekly change was +3.6 billion, and the net short dollar position decreased to -6.9 billion. Among the major world currencies, only the yen has refrained from selling off, while all other currencies saw weekly changes in favor of the dollar. The US inflation data for August will be published on Wednesday. Rising oil prices may lead to a 0.5% m/m increase in overall inflation, which could fuel another Federal Reserve interest rate hike.   However, slowing wage growth could have a positive impact on consumer price growth in the services sector. At the moment, the markets are convinced that the Fed will take a break at the next meeting, the likelihood of a rate hike is only 7%, and the key meeting in this cycle will be in November, which is still far off. We believe that the US dollar is still the main favorite of the foreign exchange market, and investors will continue to buy because the market is convinced of the strength of the US economy. Although the greenback retreated from its previous highs on Monday, the other currencies look weaker. A possible rate hike by the European Central Bank is unlikely to strengthen the euro's position because weak economic data reduce the chances of decisive action by the ECB, and any sign of weakness on the part of the bank will be perceived by markets as another confirmation of the dollar's strength.   EUR/USD The ECB will hold its meeting on Thursday, where a final rate hike of 0.25% is expected. The markets still do not have a consensus on whether this hike will happen next Thursday or if the ECB willtake a pause until the next meeting. The high wage growth rates in the eurozone favor a rate hike. In the second quarter, wage growth was 5.6% y/y, even higher than the 5.4% in the previous quarter and exceeding the ECB's estimate of 5.3%, which was presented in June.   Accordingly, the threat to core inflation remains high, and it is expected to fall to 3% in the second half of 2024. ECB officials are sending mixed signals, and there is no unified position. Some hint at the need to take a pause, while others focus on high core inflation and urge not to stop. The European Commission has lowered its economic growth forecast for the eurozone by 0.3% for 2023 and 2024 to 0.8% and 1.4%, respectively. The inflation forecast for the current year has been reduced to 5.6%, but it has been raised to 2.9% for the following year. The European Commission believes that the ECB will raise rates by 0.25% on Thursday, claiming that the market is leaning toward this opinion.     The European Commission holds a pessimistic view of the prospects for eurozone economic growth, which does not contribute to euro demand. The value of the net long euro position fell by 1.6 billion to 18.2 billion during the reporting week. Net positioning continues to be bullish, and the trend favors selling the euro. The price is below the long-term average, which supports further euro depreciation, but the dynamics are neutral.     EUR/USD, as we suggested a week ago, broke below the lower band of the channel at 1.0764 and headed towards the local low of 1.0634. Traders will likely test the low; the question is whether the euro will break this support on the first attempt, or if a second wave will be needed. In case the euro continues to correct higher, we can expect a retracement to the resistance zone of 1.0790/0810. We consider this scenario less likely, as we believe that the euro will fall further, with the support zone of 1.0605/35 as the target. GBP/USD The pound has slightly recovered from its decline following hawkish comments from the Bank of England. Speaking in Canada, Monetary Policy Committee member Catherine Mann signaled she's likely to support further rate hikes as she sees persistent inflation harder to fight than a downturn. She also said it is a "risky bet", but it's better to make a mistake that can be corrected later, and this implies a call for further rate hikes. The labor market report for August was set to be published on Tuesday, with investors focused on the average earnings growth rate. It is expected that the 3-month measure will remain at 7.8%. Any deviation from the forecast could change rate expectations, potentially leading to increased volatility for the pound. The value of the net long pound position fell by 0.2 billion to 3.6 billion during the reporting week. Despite a fairly deep sell-off in recent weeks, net positioning continues to be bullish, which does not prevent the price from falling.   As expected, the pound successfully tested the support at 1.2545. There are almost no reasons for an upward reversal, and any potential corrective rise is limited by the resistance zone of 1.2545/65. We expect the bearish sentiment to persist. The goal is an update of the local low and a move below 1.2440, with the next target being 1.2290/2310. Here, the pound may find strong support. From a technical perspective, falling below this area would suggest the end of the long-term uptrend.  

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.

GBP: Services inflation to stay above 6% The data flow picks up this week in the UK, with labour (Tuesday), CPI (Wednesday) and retail sales (Friday) statistics for the month of December being released. Services inflation is what matters the most for the Bank of England at the current stage and we expect to see it at 6.1% this week, considerably below the Bank of England's estimates. Despite the improvement in services disinflation, 6%+ remains too high and is unlikely to make the BoE endorse dovish rate expectations just yet. EUR/GBP can retest the 0.8573 lows, but we expect it to find a bit more support this week as the euro may benefit from some hawkish comments by Lagarde in Davos. Our medium-term view on the pair remains bullish.

UK inflation unexpectedly rises By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was just another day where another policymaker pushed back on the exaggerated rate cut expectations. Federal Reserve's (Fed) Christopher Waller said that the Fed should go 'methodically and carefully' to hit the 2% inflation target, which according to him is 'within striking distance', but 'with economic activity and labour markets in good shape' he sees 'no reason to move as quicky or cut as rapidly as in the past', and as is suggested by the market pricing. So that was it. Another enlightening moment went down the market's throat in the form of a selloff in both equities and bonds. The US 2-year yield – which captures the rate expectations rebounded 12bp, the 10-year yield jumped past the 4%, the US dollar index recovered to a month high and is testing the 200-DMA resistance to the upside this morning, while the S&P500 retreated 0.37%.   Waller spoke from the US yesterday, but many counterparts are wining, dining and speaking in the World Economic Forum in Davos this week, which doesn't only offer snowy and a beautiful scenery this January, but it also serves as a platform to many policymakers to bring the market back to reason. Expect more comments of this hawkish kind during this week. It turns out that one of the most popular topics of this year's WEF is rising inflationary risks due to the heating tensions in the Red Sea which disrupt the global trade roads and explode the shipping costs.