EUROPEAN FX UPDATE: DXY holds near lows whilst the SNB holds, Norges hikes and eyes turn to the BoE and ECB

Analysis details (10:02)

DXY

• A subdued morning for the broader Dollar and index in a continuation of the losses seen after markets were surprised by the extent of the Powell pivot, which dragged the DXY down from a pre-FOMC level of around 103.90 to a post-Fed APAC low of 102.42. “For us in FX, we had not expected it this early but last night's dovish Fed shift triggered a massive bull steepening in the US curve – a move that is the centrepiece of our call for a broadly lower dollar next year”, say the analysts at ING, with USD traders now looking for impulses from the BoE and/or ECB meetings. In terms of technicals, DXY yesterday fell through both its 21 DMA (103.53) and 200 DMA (103.51) before taking out the low set on 29th November (102.46) to print a 102.42 low – matching the 11th August trough (102.42) in close proximity before the 102.00 level. Under that, the low from the 10th of August (101.78) is still some way away.

EUR, GBP

• The Sterling and Single Currency more modest gains against the USD compared to some G10 peers are participants look ahead to the BoE and EUR confabs (Previews available on Newsquawk Research Suite). For the BoE at 12:00GMT, expectations are for the MPC to stand pat, and maintain its Base Rate at 5.25% for a third consecutive meeting Ultimately, with economic developments not shifting enough to warrant a change in stance from the Bank, consensus expects the MPC to continue to vote 6-3 in favour of standing pat on rates (hawkish dissent from Greene, Haskel and Mann). In terms of the policy statement, the MPC will likely reiterate that “policy will need to be sufficiently restrictive for sufficiently long to return inflation to the 2% target.” Over to the ECB at 13:15GMT, expectations are for the ECB to stand pat on rates for a second consecutive meeting after halting its hiking campaign in October. The focus will be on accompanying projections and how they align with the market's aggressive bets for 2024 rate cuts.


• GBP/USD topped 1.2650 in recent trade after rising from a pre-Fed 1.2500 low yesterday after finding support near its 200 DMA (1.2498). GBP/USD mounted the 5th Dec high (1.2651) as it eyes the 4th Dec peak (1.2724). EUR/USD saw a Fed-induced rally to a high of 1.0896 yesterday (vs a low of 1.0773), with the pair also rising above its 200 DMA (1.0827). EUR/USD topped 1.0900 overnight as the Dollar continued to edge lower in APAC hours and trades within a 1.0873-0915 range at the time of writing – briefly topping the 1st Dec high at 1.0913 with the next level to the upside the 30th Nov peak at 1.0983. EUR/USD also sees some EUR 10.8bln worth of OpEx in EUR/USD scattered between 1.0810 and 1.0910 (Details posted on the Newsquawk feed). EUR/GBP found resistance near its 100 DMA (0.8635) as it trades within a 0.8614-34 band.

CHF, NOK, SEK

• Sticking with European central banks, the SNB and Norges released their respective decisions this morning. SNB maintained its Policy Rate at 1.75% as expected and said it is prepared to be active in the FX market as necessary (removed reference to “selling”). Forward guidance was also tweaked to say it “will adjust its monetary policy if necessary to ensure inflation remains within the range consistent with price stability over the medium term.” (prev. “it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term.”) Two-way action was seen in EUR/CHF which initially immediately moved lower from 0.9499 to 0.9460 before recoiling back to highs of 0.9518 and then stabilising just under pre-announcement levels around 0.9492, while a modest dovish reaction seen in market pricing.


• Elsewhere, Norges Bank unexpectedly hiked its Key Policy Rate to 4.50% from 4.25% (exp. a hold at 4.25%) and suggested the forecast indicates that the policy rate will lie around 4.5% until autumn 2024 before gradually moving down. Interestingly, the repo path and statement do not rule out further tightening. With around a 20% chance of a 25bp move by Q2-2025 implied. However, given the recent pivot from the Fed and pronounced market pricing for global easing today's 4.50% rate is likely the peak. The hike sparked marked NOK appreciation against both the EUR and USD. USD/NOK fell from 10.70 to 10.60 before falling to a 10.5860 trough while EUR/NOK fell from 11.6745 to 11.5690 before slipping to an 11.5434 trough.


• For the SEK, the morning saw softer-than-expected CPIF data – the Riksbank’s preferred measure of inflation, with the CPIF Ex Energy Y/Y (Nov) printing at 5.4% vs. Exp. 5.9% (Prev. 6.1%). Riksbank had forecast 5.9% Y/Y for CPIF-XE, the release marks another consecutive month of below-forecast core inflation with the focus on core heightened even further by the volatile influence of electricity prices currently. Overall, the data skews the 50/50 between a hike and a hold outlined by Governor Thedeen towards a hold in February. At this point, the Riksbank will also have access to December's data. A view that receives further dovish support given the FOMC's December pivot.

JPY

• The JPY is the top gainer in the European morning amid the hefty fall in the Dollar and US yields, whilst stocks in recent trade have been trimming earlier gains. USD/JPY tumbled from a pre-Fed high of 145.99 to a post-Fed low of 142.63, with the downside extending throughout APAC hours to levels under its 200 DMA (142.47) to today’s intraday low of 140.94, with sentiment in the JPY also supported by a surprise expansion in Machinery Orders M/M, whilst the Y/Y contracted much less than feared. The next obvious level to the downside is the 31st July trough at 140.68. JPY traders will also be attentive to EUR/JPY and GBP/JPY as the ECB and BoE are gearing up for their policy announcements. EUR/JPY briefly dipped under its 200 DMA (154.19) and nearly matched the 8th Dec low (153.86) as it trades within a 153.85-55.56 range thus far. GBP/JPY briefly fell under the 7th Dec low (178.53) to a 178.33 low ahead of its 200 DMA (178.01).

AUD, NZD, CAD

• The high-beta FX are among the top gainers following the boost to risk sentiment and the Fed-induced surge in commodity prices. Analysts at ING, following the Fed decision “think this shift towards a more reflationary policy setting stands to see outperformance of the undervalued commodity currencies, and again, overnight the under-valued Australian and New Zealand dollars led the pack.” AUD/USD firmly topped its 200 DMA (0.6575) after oscillating on either side of the level for the past 7 sessions. AUD sentiment was also bolstered by the overall firm Labour Force report overnight which saw a much larger-than-expected employment change, and a surprise rise in participation (vs expected fall), although the unemployment rate also unexpectedly ticked up by more than forecast. NZD shrugged off the disappointing Q3 New Zealand GDP metrics. NZD/USD reclaimed 0.62+ status after briefly dipping under its 200 DMA (0.6088) yesterday. USD/CAD tests 1.3450 to the downside after falling under both its 100 DMA (1.3594) and its 200 DMA (1.3511) during yesterday’s session.

14 Dec 2023 - 10:09- Fixed IncomeEU Research- Source: Newsquawk