EUROPEAN FX UPDATE: Buck bounces firmly as Fed plots loftier rate trajectory

Analysis details (10:26)

DXY

The Greenback extended recovery gains on the back of a more hawkish than many anticipated FOMC policy meeting. In short, 2023 dot plots retained guidance for one more hike and next year’s median forecast was raised by 50 bp to 5.10%, signalling only half point worth of easing and this message was reinforced by Fed Chair Powell in the subsequent press conference. Meanwhile, the accompanying statement said economic activity is expanding at a 'solid' pace compared to moderate previously and while job gains have 'slowed' from robust levels, they remain strong, while inflation remains elevated and the central bank remains 'highly attentive' to inflation risks. Moreover, Powell said the FOMC is fairly close to where it needs to get and would not attribute huge importance to one more hike, but also noted that stronger economic activity is the main reason for needing to do more with rates. The Dollar index rebounded sharply from 104.660 to close at 105.440 and above a key Fib that was technically bullish before reaching 105.680 and fading as several psychological levels held vs major peers.

CHF/SEK/NOK

All looking for independent direction from their respective Central Banks in the post-FOMC fallout and getting vastly different vibes. Indeed, the Franc was caught out by the SNB deciding to stand pat rather than deliver a 25 bp hike to match the majority of market expectations, not to mention the ECB earlier this month. The Bank maintained that it cannot be ruled out that a further tightening of monetary policy may become necessary, but its updated forecasts were based on the premise that rates remained at the current 1.75% and Chairman Jordan noted nominal overvaluation of the Chf that has contributed to lower inflation in Switzerland. Eur/Chf spiked from 0.9565 to 0.9655 and Usd/Chf from 0.8985 to 0.9069 in response. Elsewhere, the Riksbank stuck to the script with a rise in the repo rate to 4% from 3.75% and also kept the door ajar for another increase, but this was not evident in the new rate path and the Swedish Crown knee-jerked lower. However, Eur/Sek reversed course between 11.9329-11.7859 parameters before bouncing again as the Bank confirmed its intention to hedge some FX reserves via the sale of Usd 8 bn and Eur 2 bn, equating to around 25% of the total. Conversely, the Norwegian Crown was boosted by the Norges Bank’s hawkish ¼ point hike to 4.25% and more inclined rate path underscoring the prospect of a final 25 bp rise in December, with Eur/Nok paring back within a 11.5364-11.4562 range.

JPY/EUR/GBP

The Yen hit new lows against the Greenback post-Fed and pre-BoJ, but arrested the slide just ahead of 148.50 almost irrespective of Japan’s Chief Cabinet Secretary Matsuno warning against the latest advance in Usd/Jpy, while the Euro found support into 1.0600 via a Fib and perhaps hefty option expiry interest at the strike (1.8 bn). In contrast, Sterling lost support from late May troughs and briefly lost 1.2300+ status awaiting the BoE at high noon with more angst and uncertainty than usual given that UK CPI prompted a last minute change in pricing to a very close call from big probability of another 25 bp hike.

CAD/NZD/AUD  

Risk aversion and the Fed’s hawkish tilt undermined the Loonie, Kiwi and Aussie to varying degrees, as Usd/Cad jumped from 1.3452 to 1.3501, Nzd/Usd retreated from 0.5951 to 0.5902 and Aud/Usd recoiled from 0.6452 to 0.6403. Nonetheless, the Loonie derived underlying traction from heightened expectations that the BoC will hike again following hot Canadian inflation and jobs data of late and the Kiwi drew some encouragement from the fact that NZ Q2 GDP beat consensus comfortably and Q1 was tweaked to show no technical recession.

EM

The Cny and Cnh were cushioned from the worst of the broad Usd revival by the PBoC raising its midpoint buffer to 1300+ pips, while the Try gleaned some respite from an improvement in Turkish consumer confidence in the run up to the CBRT and the Zar eased back with Gold in advance of the SARB.

21 Sep 2023 - 10:26- Research Sheet- Source: Newsquawk