Rates: Hawkish Fed and sell-off at long end?
The Fed will hike its policy rate, but we also expect changes to the dot plot: a higher estimation of the neutral rate (3% from 2.75%) and a potential shift already in 2018 (4 from 3) and/or 2019 dots. Markets partly frontrunned on the short term shift, but don’t anticipate a higher neutral rate. Therefore, we mainly expect a sell-off a the longer end of the US yield curve.
Currencies: Fed ‘dot-plot’ to support a further USD rebound?
EUR/USD easily reversed Monday’s ECB’ driven rise yesterday. Focus turns to the Fed policy decision today. Powell and Co indicating four rate hikes this year and lifting the neutral rate back to 3.0% might trigger a further USD rebound. Sterling traders will look out whether the UK labour data confirm the case for a May BoE rate hike.
The Sunrise Headlines
- US stock markets slightly rebounded after Tuesday’s heavy sell-off, but Facebook continued to lag behind. Asian stock markets rebound as well with Japan closed for Vernal Equinox Day.
- The Fed will hike rates at Fed Powell’s inaugural meeting at the helm of the central bank. We also expect a more upbeat economic assessment and a hawkish shift in the new dot plot, including a higher neutral rate.
- The Trump administration has dropped a demand that all vehicles made in Canada and Mexico for export to the US contain at least 50% US content, the Globe and Mail report, citing sources with knowledge of the NAFTA talks.
- The White House is preparing to crack down on what it says are improper Chinese trade practices by making it significantly more difficult for Chinese firms to acquire advanced US technology or invest in American companies, individuals involved in the planning said.
- The world’s financial leaders (G20) rejected protectionism and urged “further dialogue” on trade, but failed to diffuse the threat of a trade war days before Washington is to announce measures against China.
- Fitch affirmed its A+ rating on China, and said tighter regulations have curbed financial risks without jeopardising growth targets, but warned that it remains to be seen if Beijing would stay committed to debt stabilisation.
- Apart from the Fed meeting, today’s eco calendar contains the UK labour market report, a German Bund auction and the RBNZ’s policy decision
Currencies: Fed ‘Dot-Plot’ To Support A Further USD Rebound?
New Fed ‘dot-plot’ to support the dollar?
The focus of FX traders turned again to the Fed after an ‘ECB-driven’ rally of the euro on Monday. Interest rate differentials widened in favour of the dollar. Currency investors apparently didn’t want to be positioned short USD. EUR/USD reversed Monday’s rise and closed the day at 1.2242 (from 1.2335). The gain of USD/JPY was more modest. Still, the pair closed at 106.53, well off the recent lows.
Overnight, Asian risk sentiment isn’t too bad as investors look forward to the Fed’s policy decision. Japanese markets are closed. BOJ deputy governor Amamiya indicated that one can’t rule out the BOJ to adjust rates before the 2% target is reached, but that there is no reason to consider a rate hike now. USD/JPY lost a few ticks after the Amamiya headlines. EUR/USD also regains slightly ground.
Today, all eyes are on the Fed’s policy decision. A 25 bps rate hike is discounted. Markets will mainly look at the new Fed forecasts (dots) and at Chairman Powell’s assessment at its first press conference. For an in depth analysis, see the Fixed income part of this report. We assume that the Fed dots will signal four rate hikes in 2018. We also closely monitor whether the Fed raises the neutral rate back to 3.0%. If so, it could be important for global markets and for the dollar. Yesterday’s price action was already USD constructive. Monday’s EUR/USD rise was easily reversed. This suggests that the market still found itself a bit too much euro long/USD short. If our dotsscenario materializes, there is room for a ST USD rebound. EUR/USD 1.2155 is the first important support. A break opens the way to the 1.20 area. The gain in USD/JPY might be more modest than in USD/EUR.
Sterling gained further ground against a declining euro yesterday and held stable against the dollar despite softer CPI data. UK labour data take center stage today. Modest labour growth is expected, but average earnings are expected to rise slightly to 2.6% Y/Y. We don’t have much reason to take a different view from the consensus. However, a positive surprise might reinforce BoE rate hike expectations and be slightly supportive for sterling. A test of the EUR/GBP 0.8690 support might be on the cards, especially if EUR/USD declines after the Fed
EUR/USD Fed to open the way for further USD gains?
