EUROPEAN FX UPDATE: Greenback grounded as Fed gets closer to rate peak

Analysis details (10:15)

DXY/CHF/NOK

A dovish hike from the FOMC in more ways than one, as a pause was considered before lifting rates by 25 bp and guidance was adjusted via the accompanying statement to signal that some further tightening ‘may’ be appropriate instead of ‘will’ be required. Fed Chair Powell also noted that financing conditions have tightened considerably more than had been anticipated due to the banking crisis and this will impact growth, hiring and inflation. The upshot, less need for additional monetary policy firming and a deeper Dollar retreat on prospects that the terminal rate will be reached sooner than later, especially as the median dot plot peak remained unchanged at 5.1%. However, the index found some underlying support just below 102.000 between 102.440-101.910 parameters as several constituent currencies ran into resistance at or near psychological levels, such as the Euro on the 1.0900 handle, the Pound approaching 1.2350 and the Yen having probed 130.50. Moreover, the Franc stalled beyond 0.9125 after the SNB raised rates by half point and indicated that further hikes cannot be ruled out, as inflation is still clearly above the range that the Bank equates with price stability. Ramming home the point, the SNB highlighted stronger second-round effects and the fact that inflationary pressure from abroad has increased again mean that, despite higher policy rate, new inflation forecasts are higher through to mid-2025 than they were in December. In similar vein, the Norges Bank flagged more hikes following its latest increase via a loftier repo rate path and the Nok only pared some of its pre-announcement strength temporarily on the grounds that it confirmed guidance for 25 bp and disappointed some that were looking for 50 bp.

NZD/AUD

The Kiwi took full advantage of Buck weakness with some independent impetus via the RBNZ as Chief Economist Conway said if inflation expectations don't fall, the Bank will have to do more on interest rates, adding that the economy is slowing, but the RBNZ is still not sure whether rates are high enough. Nzd/Usd peaked just shy of 0.6300 and outpaced Aud/Usd that topped out around 0.6750 after forewarning from the RBA that a pause will be reconsidered at the next policy meeting in April.

GBP/CAD/EUR/JPY   

All firmer vs their US counterpart, as Sterling retained 1.2300+ status ahead of the BoE amidst more conviction that the MPC will deliver a 25 bp hike hot on the heels of much stronger than forecast inflation data, but ongoing uncertainty over the vote split, tone of the minutes and guidance in the accompanying statement. Elsewhere, the Loonie gleaned some traction within a 1.3734-1.3662 range following BoC minutes stating that ahead of the March meeting, it remained concerned that inflation could become stuck materially above target. Furthermore, the Bank felt it was important to stress the conditionality of a rate hike pause and wanted to underline that it continued to assess whether monetary policy was restrictive enough. The Euro was encouraged by more hawkish ECH rhetoric, but lost momentum circa 1.0929 and the Yen waned when yields rebounded from post-FOMC lows and it failed to sustain gains through 130.50.

EM

Broad gains against the Usd and the Twd boosted by an unexpected 1/8 point tightening move from the Bank of Taiwan, while the Hkd maintained its peg with help of the HKMA matching the Fed, the Zar outperformed as Gold extended its recovery rally and the Brl benefited from the BCB maintaining hawkish guidance irrespective of increasing pressure from Brazil’s Government to loosen the reins. On that note, the Try could be prone to more downside if the CBRT cuts rates again following a decline in Turkish consumer sentiment.

23 Mar 2023 - 10:15- Fixed IncomeResearch Sheet- Source: Newsquawk