Rates: Fed makes modest hawkish shift; markets slightly ‘disappointed’
The US yield curve correctively bull steepened after yesterday’s FOMC meeting. The hawkish shift by the Fed just failed to meet the market’s hurdle. The median rate projections for 2019, 2020 and the neutral rate increased while the 2018 ‘dot’ was unchanged, even if it was a close call.
Currencies: Fed not hawkish enough to trigger further USD gains
Of late, the dollar profited from a ‘hawkish’ market positioning ahead of the FOMC meeting. The Fed governors raised their dots, but not enough to trigger further USD gains. For now, the stalemate in EUR/USD trading persists. Today, the focus turns to (softer?) EMU confidence data and to president Trump’s announcement of tariffs on Chinese imports
The Sunrise Headlines
- US stock markets traded volatile after the Fed’s verdict and eventually closed around 0.2% lower. Asian risk sentiment is mixed.
- The Fed raised its policy rate by 25 bps to 1.50%-1.75% at Powell’s inaugural meeting. The dot plot signalled more rate hikes ahead as the economic outlook strengthened and with more confidence in hitting its dual mandate.
- Congressional leaders reached an agreement on a spending bill that would fund the government until October, ending a protracted negotiation that left lawmakers little time to pass it before the current funding expires at week’s end.
- The Reserve Bank of New Zealand flagged a temporary dip in price growth as it held interest rates at record lows, its last decision before an expected deviation from its trademark pure inflation target mandate.
- Australian employment data were mixed. Net employment change (+17.5k) was slightly below consensus, but full employment added a very strong 64.9k. The unemployment rate ticked up to 5.6%, but was matched by an increase in the participation rate to a 7-yr high (65.7%).
- President Trump will announce tariffs on Chinese imports today ($50bn), a White House official said, in a move aimed at curbing theft of US technology and likely to trigger retaliation from Beijing and stoke fears of a global trade war.
- Today’s eco calendar contains German Ifo business confidence, EMU PMI’s, UK retail sales and US weekly jobless claims. The Bank of England holds its policy meeting. The EU Summit on Brexit starts and the ECB publishes its bulletin.
Currencies: Fed Not Hawkish Enough To Trigger Further USD Gains
Fed not hawkish enough to support the dollar
The dollar traded in wait-and-see modus yesterday ahead of the Fed policy decision. EUR/USD hovered in the upper half of the 1.22 big figure. USD/JPY held well north of 106. The Fed as expected raised its policy rate by 25 basis points. The median Fed forecast for the 2019/20 rate path was upwardly revised and there was also upward drift in the 2018 forecast and the neutral rate. However, this change was just not hawkish enough to meet recent market anticipation. For an in depth analysis of the FOMC decision. Short-term yields and the dollar reversed part of the recent rise. EUR/USD jumped back north of 1.23 (close 1.2338). USD/JPY closed the day at 106.05.
Asian equities don’t find a clear direction overnight. The PBOC raised a shortterm reverse repo rate by 5 bps. Regional markets look forward to the trade tariffs announcement of US president Trump. China and Korean markets slightly underperform the region. EUR/USD trades near 1.2350. USD/JPY is holding below the 106 mark. AUD/USD reversed a small part of the post-Fed rebound on mixed labour data.
German IFo business confidence and the March EMU PMI are published today. Recently, EU business confidence eased off record levels. This drift is expected to continue. The data still point to solid growth. Even so, another negative surprise might be slightly euro negative. Later, US president Trump is expected to announce tariffs on Chinese imports. Markets try to assess the potential retaliation. A risk-off reaction might weigh on USD/JPY. The impact on EUR/USD is less clear. Yesterday’s Fed decision didn’t break the stalemate in EUR/USD trading. For now, we assume that the downside of the dollar/topside in EUR/USD remains rather well protected, but there is no trigger for a substantial USD up-leg. For that to happen, good US data are needed. The 1.2155-1.2446 trading range remains in place. We slightly favour a sell-on upticks bias. UK retail sales will be published today and the BoE announces its policy decision. A modest rebound after two months of soft sales is expected. The BoE is expected to keep the door open for a May rate hike even as February inflation was slightly softer than expected. EUR/GBP recently drifted south in the 0.9033/0.8688-52 trading range. A downside test is possible, but we don’t expect a clean break yet.
EUR/USD stalemate persists as Fed confirms ‘gradual’ policy normalization
