EUROPEAN FX UPDATE: Dollar resurgence prompted by Powell pushbacks

Analysis details (10:18)

DXY

The well known adage ‘don’t fight the Fed’ springs to mind, although in this case it was Chair Powell who bated Buck bears that were on the prowl after the latest FOMC and aroused by the apparent change in forward guidance. To recap, rates were raised another 75 bp, as expected, but the accompanying statement said the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments will all be taken into account when determining the pace of future hikes. However, this dovish-sounding section was more than overwritten by Powell in the press conference and Q&A where he underscored the commitment to bringing inflation back to its 2% goal and the likelihood that this will need a restrictive stance of policy for some time. Moreover, the Fed still has some way to go, data suggests the ultimate level of rates will be higher than previously expected, the time for slower rate hikes may come as soon as December or February and it is very premature to think about a pause. In response, the Greenback rebounded sharply from initial post-FOMC lows that saw the index slump to 110.400 and extended its recovery across the board as the DXY took aim at 113.000 from a 112.940 high.

GBP/CHF/NZD/AUD   

Sterling may yet get a boost from the BoE via a bigger than forecast and factored in ¾ point rate increase, hawkish MPC vote split and/or guidance within the minutes, MPR and post-meeting commentary from Governor Bailey and Mann, but in advance of midday the Pound suffered outsize losses with Cable retreating through a series of psychological and technical levels between 1.1422-1.1244 parameters, irrespective of an upgrade to the final UK services PMI. Elsewhere, the Franc was not helped by Swiss CPI falling a shade short of consensus, the Kiwi by RBNZ Governor Orr expressing a high degree of confidence that inflation can be brought to heel, and the Aussie did not get much leverage from a wider than anticipated trade surplus. Indeed, Usd/Chf breached 1.0000, Nzd/Usd lost grip of the 0.5800 handle and Aud/Usd reversed through 0.6300.

JPY/CAD/EUR

The Yen put up some resistance against its US peer around 148.00 in risk-averse and Japanese holiday trade before yielding, the Loonie lost 1.3700+ status ahead of Canadian trade data and the Euro probed 0.9750 where circa 1 bn option expiries roll off at the NY cut, as the post-Fed reaction gathered momentum.

SCANDI/EM

A dovish Norges Bank hike undermined the Nok rather than a downturn in Brent, as the Bank confirmed guidance for 25 bp and markets were split between ¼ point and 50 bp, while the statement highlighted that the slowing Norwegian economy is carrying greater weight for policy decisions than above target inflation. Conversely, the Sek derived some traction from an upturn in Sweden’s services PMI and the Try was not too rattled by another rise in Turkish CPI or spike in PPI, perhaps as the former was not quite as high as feared, but the Cny and Cnh were hampered by worse than expected Caixin services and composite Chinese PMIs.

03 Nov 2022 - 10:18- Fixed IncomeData- Source: Newsquawk