Sunrise Market Commentary
- Rates: Fed hikes rates, but markets wanted more
The Fed raised its policy rate by 25 bps to 0.75%-1%, but the median rate projections for 2017-2019 and the long run remained broadly unchanged. While Yellen indicated that the Fed would step up its tightening pace, markets were positioned for a more hawkish message. The US yield curve shifted up to 12.5 bps lower, the belly outperforming.
- Currencies: Dollar declines as Fed hikes rates. Euro gains on Dutch election result
The dollar ceded ground across the board after the FOMC decision. The market was apparently positioned for a more aggressive Fed signal. The euro also gained as there is no role for Wilders in the formation of a new Dutch government. How far will the post-FOMC repositioning go? We assume key USD support levels to hold.
The Sunrise Headlines
- US equities rallied after the Fed hiked rates, but without turning hawkish towards the near future. Overnight, Asian stock markets receive a boost with Japan underperforming on the back of a lower USD/JPY
- The Fed said it would raise short-term interest rates and keep lifting them this year, moving the central bank into a new, more aggressive phase of draining easy money from the financial system as the economy improves.
- The BoJ kept monetary policy on hold as it battles to reach 2% inflation. Short-term interest rates will stay at -0.1%, 10y bond yields will be capped near 0%, and asset purchases remain at about ¥80T/year
- Rutte looks certain to form the Netherlands next government, with his party projected to secure a clear victory over rivals including populist challenger Wilders. A scattered political landscape will make it hard to form a coalition.
- China's central bank has raised interbank interest rates in a move designed to limit investors' interest in moving money from China to the US following the Federal Reserve's interest rate rise overnight.
- Australia's jobless rate climbed to a 13-month high in February and employment unexpectedly fell, a risk to the outlook for wage growth and inflation that will likely keep open the possibility of another interest rate cut.
- Today's eco calendar contains final EMU CPI, US initial jobless claims, Philly Fed Business Outlook and auctions in Spain & France. The Swiss National Bank, Norges Bank and Bank of England hold policy meetings.
Currencies: Dollar Declines As Fed Hikes Rates. Euro Gains On Dutch Election Result
Dollar declines as Fed hikes policy rate
Yesterday, the dollar drifted sideways ahead of the FOMC decision. The Fed as expected raised its policy rate by 25 bps. Yellen indicated a further gradual policy normalisation as the Fed meets its objectives. The market was apparently positioned for more aggressive communication. The dollar ceded ground across the board. Later, the euro found support as the first Dutch exit-polls made clear that the populist PVV party has no role in the formation of a new government. EUR/USD closed the session at 1.0734, the highest level in more than a month. USD/JPY finished the session at 113.38 (from 114.75 on Tuesday).
Overnight, Asian markets joined the post-Fed trends from the US. The dollar holds near the recent lows. The decline of core bond yields and of the dollar supports equities. Regional indices gain about 1%. Commodities/commodity related assets perform well. Japan underperforms on USD/JPY weakness (currently in the 113.25 area). The BOJ left its policy rate (-0.1%) and the target level for the 10y government bond yield (0.0%) unchanged. The market reaction was very limited. Eco data in Australia (labour market report) and in New-Zealand (Q4 GDP) disappointed. The Aussie (AUD/USD 0.7690) and the kiwi dollar (NZD/USD 0.70 area) returned a small part of the post-Fed gains. EUR/USD hovers in the 1.0720/45 area this morning, maintaining the post-Fed gain.
Today, the eco calendar is moderately interesting. In EMU, the final February CPI will be published. In the US, the calendar is better filled with the housing starts, building permits, jobless claims and the Philly Fed business outlook. Especially the claims and the Philly Fed survey might have some intraday impact on USD trading. Claims are expected to decline slightly to 240 000. The Philly Fed is expected to decline to 30 from an extremely high 43.3. Recently, confidence indicators remained at fairly strong levels and we expect this to remain the case. The key question is whether markets will continue their soft reaction to the Fed's communication. We are a bit surprised by the substantial decline of US bond yields, even as Yellen suggested that, considering the eco developments, the Fed policy might be relatively close to the 'dot-path'. The Fed also didn't assume much fiscal easing in its assessment. The day-to-day momentum is USD negative, but if US eco data remain OK, the correction doesn't have to go far. EUR/USD might still feel some support from the outcome of the Dutch elections this morning, but we assume that this effect will peter out very soon
EUR/USD 1.0874 resistance remains the line in the sand with intermediate resistance at 1.0829. We maintain the view that a sustained break of EUR/USD above this area will be difficult, even after yesterday's Fed message. The US/German (EMU) interest rate differential remains at an absolute high level. Especially at the short end of the curve, the differential might even re-widen after yesterday's easing. The fundamentals/interest rate differentials are in theory also supportive for USD/JPY, but of late the momentum/technical picture was not really convincing. We maintain the working hypothesis that the 111.60 range bottom should hold.
EUR/USD rebounds on after FOMC decision and on pro-European outcome of Dutch elections
BoE to keep wait-and-see approach
Yesterday, sterling showed again some sharp swings at the onset of the European session. This time, the UK currency jumped higher, without an obvious driver. Mid-morning, the UK labour market report was fairly strong but sterling traders focused on disappointing wage growth. Sterling reversed part of the earlier gains against the euro and the dollar. After the Fed decision, sterling mostly followed the USD moves. Cable rebounded to the 1.23 area. EUR/GBP didn't profit much from the rise in EUR/USD. The pair closed the session at 0.8733.
Today, the BOE will announce its policy decision and published the meeting minutes. No policy change is expected. Given the recent softening in some UK data, ongoing modest price rises and the Brexit negotiations coming closer, the BOE will feel comfortable with its wait-and-see approach. In theory, this is modestly sterling negative. However, the recent price action suggest that the recent decline of sterling needs a breather. So, we don't expect the BoE meeting to change the broader picture for sterling for the better. Sterling sentiment softened of late. EUR/GBP cleared the 0.8592 resistance, which improved the technical short-term EUR/GBP picture. We don't expect a sustained EUR/USD rebound , but a combination of temporary euro consolidation and ongoing sterling softness as the Brexit negotiations are nearing, might trigger some more ST EUR/GBP gains. The 0.8854 correction top is the next key resistance. The nervous swings over the previous days suggest that a clear break beyond 0.8854 will be difficult without important news.
EUR/GBP; sterling shows some nervous swings as formal start of Brexit procedure is nearing