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FOMC: Not much ado about not much
John Hardy
Head of FX Strategy
Summary: The market reaction to the FOMC meeting overnight looked dramatic relative to recent weak trading interest, but the Fed had little new to deliver and the reaction function was a simple case of market frustration that the Fed proved less dovish than expected.
The recent abject lack of volatility made yesterday’s reaction over the Federal Open Market Committee statement release and the subsequent press conference look like a bit of a roller coaster – but really, it was largely a storm in a teacup as the market was simply out over its skis in expecting too much dovishness too soon from the Fed, and Chair Powell was unwilling to deliver.
The statement saw one comment upgrading the language on economic activity (“rose at a solid rate” rather than “has slowed from its rate in the fourth quarter”) though this was offset by the maintenance of a (reworded from March) comment that “Growth of household spending and business fixed investment slowed in Q1”.) The change that weakened the USD most directly was the alteration of the sentence discussing inflation, which was described as follows: [core price ex food and energy] have declined and are running below 2 percent.” (see graphic below). This certainly sounded more dovish than the prior “[core] inflation … remains near 2 percent”!
Graphic: the key changes to the May statement versus the March statement:
The statement saw one comment upgrading the language on economic activity (“rose at a solid rate” rather than “has slowed from its rate in the fourth quarter”) though this was offset by the maintenance of a (reworded from March) comment that “Growth of household spending and business fixed investment slowed in Q1”.) The change that weakened the USD most directly was the alteration of the sentence discussing inflation, which was described as follows: [core price ex food and energy] have declined and are running below 2 percent.” (see graphic below). This certainly sounded more dovish than the prior “[core] inflation … remains near 2 percent”!
Graphic: the key changes to the May statement versus the March statement:
But the USD selling in the wake of the statement release was quickly reversed during Powell’s press conference as it became clear that Powell didn’t want to send the message that the Fed is concerned about inflation at this point – calling recent inflation softening “transitory” and refusing to indicate a bias on the rate outlook, saying that the FOMC is comfortable with rates where they are.
This FOMC meeting doesn’t change the outlook – the Fed could still send a dramatic signal at the June meeting on its policy outlook if it has sufficiently completed its review of the policy framework, but will the Fed be behind the curve or ahead of it at that point or do we need to wait for the end of the summer time frame to get the indication that markets are too optimistic on the economic outlook and realize that even a softened Fed outlook is insufficiently aggressive to counter what ails the growth outlook.
The next key will be the US data through the end of this week, particularly the earnings and the ISM ISM Non-manufacturing after an ugly miss on the ISM Manufacturing and the March ISM Non-manufacturing printing at its lowest level since August of 2017 in March.
The Euro Zone manufacturing PMI’s are all rolling in as I am completing this update: Spain and especially Italy surprised to the upside (though Italy still below 50 at 49.1). Of the three that released preliminary versions earlier this month, France is revised up to 50.0 vs. 49.6, while Germany was revised down from its already terrible 44.5 to 44.4, and the EU-wide survey was in at 47.9 vs. the 47.8 original estimate.
Trading interest
Standing aside on the USD outlook in most pairs tactically, though a USDCHF long with stops below 1.0140 a way to trade an extension of yesterday’s FOMC reaction.
Time to take off EURSEK longs at 10.70 here this morning
Chart: EURUSD
The EURUSD reaction largely in line with the reaction in US short rates – but the tactical setup is tricky as we get a bearish reversal just after the recent bullish rejection of the sub-1.1200 breakout attempt. A close above 1.1250 looks bullish, a close below 1.1150 bearish, with default focus lower after last night’s reaction.
This FOMC meeting doesn’t change the outlook – the Fed could still send a dramatic signal at the June meeting on its policy outlook if it has sufficiently completed its review of the policy framework, but will the Fed be behind the curve or ahead of it at that point or do we need to wait for the end of the summer time frame to get the indication that markets are too optimistic on the economic outlook and realize that even a softened Fed outlook is insufficiently aggressive to counter what ails the growth outlook.
The next key will be the US data through the end of this week, particularly the earnings and the ISM ISM Non-manufacturing after an ugly miss on the ISM Manufacturing and the March ISM Non-manufacturing printing at its lowest level since August of 2017 in March.
The Euro Zone manufacturing PMI’s are all rolling in as I am completing this update: Spain and especially Italy surprised to the upside (though Italy still below 50 at 49.1). Of the three that released preliminary versions earlier this month, France is revised up to 50.0 vs. 49.6, while Germany was revised down from its already terrible 44.5 to 44.4, and the EU-wide survey was in at 47.9 vs. the 47.8 original estimate.
Trading interest
Standing aside on the USD outlook in most pairs tactically, though a USDCHF long with stops below 1.0140 a way to trade an extension of yesterday’s FOMC reaction.
Time to take off EURSEK longs at 10.70 here this morning
Chart: EURUSD
The EURUSD reaction largely in line with the reaction in US short rates – but the tactical setup is tricky as we get a bearish reversal just after the recent bullish rejection of the sub-1.1200 breakout attempt. A close above 1.1250 looks bullish, a close below 1.1150 bearish, with default focus lower after last night’s reaction.
The G-10 rundown
USD – less dovish FOMC supports the USD as a knee-jerk reaction, but the USD was doing rather well even during the prior repricing of the Fed rates to the downside, so we question the durability of the reaction or narrative that the Fed is less dovish now.
EUR – conflicting short-term technical in EURUSD – a close back above 1.1250 points the needle higher while the bar is tough to clear tactically for a convincing downside argument – starts with a close below 1.1150.
JPY – higher US rates are JPY negative, but if the market decides it has overreacted the “lack of dovishness” from the Fed, USDJPY could sell-off quickly – the technical are bearish on a decline through the sub-111.00 pivots.
GBP – hard to see the BoE making waves today with ongoing Brexit uncertainty, weaker core inflation and a stable and even firm sterling. Some analysts/headlines are touting the risk of a BoE hawkish surprise, but I don’t get it. If the USD firms broadly and GBPUSD heads back below 1.3000, bears would be happy to pounce on the short side. Until then, caution.
CHF – EURCHF rally looks in good order, but needs to clear 1.1500 to make a real point - that requires a better sense that the euro growth outlook is improving again and maybe even eventual prospects of an EU fiscal stimulus – too early on that front.
AUD – the market is about 40/60 on the probability of an RBA rate cut next Tuesday as AUDUSD trades near the critical 0.7000 area.
CAD – USDCAD has bounced on the FOMC reaction, but not yet enough to call it a full reversal. Need closer to 1.3500 to more firmly point the needle back higher.
NZD – interesting to watch how AUDNZD deals with the RBA meeting next Tuesday as both countries on a similar rate path – we prefer NZD to lose in the end, but from here or from, say, 1.0400?
SEK – may be too much to expect EURSEK to clear 10.72 highs with markets in a relatively good mood and the trajectory of EU data pointing higher for the moment.
NOK – NOK getting a bit too weak tactically relative to the backdrop now – perhaps 9.75 offers resistance in EURNOK barring steep crude oil sell-off?
Upcoming Economic Calendar Highlights (all times GMT)
1100 – UK BoE Rate Announcement / Inflation Report
1100 – Czech Central Bank Announcement
1130 – UK BoE Carney Press Conference
1230 – US Weekly Initial Jobless Claims
1400 – US Mar. Factory Orders
USD – less dovish FOMC supports the USD as a knee-jerk reaction, but the USD was doing rather well even during the prior repricing of the Fed rates to the downside, so we question the durability of the reaction or narrative that the Fed is less dovish now.
EUR – conflicting short-term technical in EURUSD – a close back above 1.1250 points the needle higher while the bar is tough to clear tactically for a convincing downside argument – starts with a close below 1.1150.
JPY – higher US rates are JPY negative, but if the market decides it has overreacted the “lack of dovishness” from the Fed, USDJPY could sell-off quickly – the technical are bearish on a decline through the sub-111.00 pivots.
GBP – hard to see the BoE making waves today with ongoing Brexit uncertainty, weaker core inflation and a stable and even firm sterling. Some analysts/headlines are touting the risk of a BoE hawkish surprise, but I don’t get it. If the USD firms broadly and GBPUSD heads back below 1.3000, bears would be happy to pounce on the short side. Until then, caution.
CHF – EURCHF rally looks in good order, but needs to clear 1.1500 to make a real point - that requires a better sense that the euro growth outlook is improving again and maybe even eventual prospects of an EU fiscal stimulus – too early on that front.
AUD – the market is about 40/60 on the probability of an RBA rate cut next Tuesday as AUDUSD trades near the critical 0.7000 area.
CAD – USDCAD has bounced on the FOMC reaction, but not yet enough to call it a full reversal. Need closer to 1.3500 to more firmly point the needle back higher.
NZD – interesting to watch how AUDNZD deals with the RBA meeting next Tuesday as both countries on a similar rate path – we prefer NZD to lose in the end, but from here or from, say, 1.0400?
SEK – may be too much to expect EURSEK to clear 10.72 highs with markets in a relatively good mood and the trajectory of EU data pointing higher for the moment.
NOK – NOK getting a bit too weak tactically relative to the backdrop now – perhaps 9.75 offers resistance in EURNOK barring steep crude oil sell-off?
Upcoming Economic Calendar Highlights (all times GMT)
1100 – UK BoE Rate Announcement / Inflation Report
1100 – Czech Central Bank Announcement
1130 – UK BoE Carney Press Conference
1230 – US Weekly Initial Jobless Claims
1400 – US Mar. Factory Orders
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