EUROPEAN FX UPDATE: Dollar takes few prisoners after Powell’s hawkish presser

Analysis details (10:37)

DXY

The latest FOMC policy statement underpinned expectations for a March rate hike without being specific on the exact timing for lift-off and laid out the principles for QT, but did not reveal the extent or lengths to which the Fed is willing to go in terms of catching up with runaway inflation. Instead, that was left to chair Powell who may have said more via refusing to rule out larger and faster tightening moves than actually providing details himself, while maintaining that it may take at least one or two, if not more meetings to formulate an actual balance sheet reduction plan. Hence, the short end of the US Treasury and STIR or money market curve has been hit especially hard amidst a reversion to bear-flattening, and this has given the Buck more bullish impetus broadly, if not quite across the board, as the index extends to a new ytd high at 96.861, just beyond trendline resistance on some charts and closer to late 2021 peaks that stand in the way of 97.000. Note, the DXY hit 96.914 on December 15th last year having peaked at 96.938 on November 24th. 

NZD/AUD  

It seems rather unfair to single the Kiwi out, but Nzd/Usd should arguably be doing better or at least holding up in wake of hot NZ inflation data rather than floundering around 0.6600. However, the RBNZ may be somewhat reticent to respond given the deteriorating COVID situation and this could also be propping Aud/Nzd up on the 1.0700 handle even though the Aussie is under 0.7100 against its US counterpart irrespective of consensus for a November RBA rate increase via a survey out overnight.

CHF/EUR/JPY

No big surprise that the low yielders and funding currencies are suffering given that the Fed is on the brink of putting further distance between itself and the SNB, ECB and BoJ. In response, the Franc has tumbled to around 0.7272 vs the Greenback, while the Euro is just shy of 1.1200 with key support not far below in the form of a Fib that is adjacent to the 2021 trough (at 1.1186), and the Yen is struggling to contain losses through 115.00 after slipping under a Fib retracement level (114.91). At this stage, 1.2 bn or so option expiry interest in Usd/Jpy between 114.75-80 does not appear to be influential, though could still have a bearing into the NY cut.

CAD/GBP

In contrast to the above, the Loonie has already clawed back from sub-1.2700 against its US peer and heighted prospects of the BoC switching to hike mode in March is a supportive factor, while Sterling already has a bit of BoE tightening under its belt and has fended off an attempt to breach 1.3400 to climb back over the 50 DMA that stands circa 1.3420 today.

SCANDI/EM

Momentum and a few other factors like a dip in Norway’s LFS jobless rate and Brent retesting Usd 90/brl, continue to favour the Nok over the Sek, while the Rub may also be getting traction from the latest rise in crude prices. Moreover, a retracement from midweek lows beneath 80.0000 vs the Usd could have been prompted by further dialogue between Russian and the US/West that infers less imminent risk of conflict. Elsewhere, the Zar is on the front foot pre-SARB amidst consensus for a 25 bp hike and the Mxn is bucking the generally weaker trend, perhap as WTI approaches Wednesday’s high. Conversely, little respite for the Try from the CBRT Governor repeating that the policy review is underway and the Lira is being prioritised as the latest survey showed the year-end CPI projection almost doubling to 23.2%.

27 Jan 2022 - 10:35- Fixed IncomeData- Source: newsquawk