EUROPEAN FX UPDATE: Fed fails to arrest Dollar slide after ‘dovish’ 25 bp hike

Analysis details (10:10)

DXY

There are valid reasons to question the extent of the fallout and negative Greenback reaction to February’s FOMC as a slowdown to 25 bp was all but priced in and guidance retained hawkish elements, such as the appropriateness of ongoing rate increases and the need to see more substantial evidence that inflation is on a sustainably lower trajectory. However, the Buck is struggling to stop the rot (rout) after bears pounced on the shift in emphasis to how much further rates must rise to be sufficiently restrictive rather than the pace of tightening, and Fed Chair Powell’s indication that it might take two more of the smaller increments to get there as the terminal level is not very far away. Moreover, he acknowledged that the disinflationary process has started and this was clearly enough to spark another spate of all round Dollar selling, with the index taking out 101.500 and a longer term prop at 101.290 on the way through 101.000 to 100.810, and needless to say new y-t-d nadir.

NZD/CAD/EUR

The Kiwi stole a march on its US rival and clawed back some lost ground vs the Aussie that had mixed survey and data releases to deal with overnight, but Nzd/Usd waned ahead of 0.6550 amidst a sharp retreat in NZ building consents that will likely keep the RBNZ on track to stick with a 50 bp hike clip later this month. Elsewhere, the Loonie also awaits housing data in the form of Canadian building permits and sits more comfortably on the 1.3200 handle against its US counterpart, albeit off best levels as the DXY regroups (to 101.200), and the Euro pared gains from 1.1033 to sub-1.1000 ahead of the ECB, but remained firmly above a key Fib retracement level.

JPY/CHF/AUD/GBP         

All making way for the aforementioned (mini) Greenback revival, with the Yen wary of latest dovish BoJ rhetoric via Deputy Governor Wakatabe (there is absolutely no change to the commitment to continue monetary easing), the Franc cognisant of a rebound in US Treasury yields over an improvement in Swiss consumer confidence, the Aussie caught between much stronger than forecast business approvals, a deterioration in NAB business sentiment and downturn in iron ore prices, and Sterling apprehensive in advance of the BoE at midday. Usd/Jpy rebounded from the low 128.00 area to top 129.00 and Usd/Chf from circa 0.9160 to 0.9100, while Aud/Usd eased back from 0.7150+ alongside Aud/Nzd to pivot 1.0950 and Cable ran into resistance around 1.2400 to trade below 1.2350 again. In fact, the Pound weakened further vs the Euro as Eur/Gbp topped 0.8900 even though the BoE and ECB are both expected to hike 50 bp and the underperformance relates in part to levels of conviction and perceptions of divergence regarding forward guidance - see 8.10GMT posts on the Headline Feed for our respective previews.

SCANDI/EM

The Nok was undermined by a deeper reversal in Brent such that it could not benefit from increased risk appetite like the Sek, while the Inr underperformed and the Zar suffered more SA power disruption to outweigh Gold’s breach of Usd 1950/oz.

02 Feb 2023 - 10:10- Fixed IncomeData- Source: Newsquawk