Chief Investment Strategist
Summary: The bullish case for the US dollar only got stronger with the Fed’s pushback to March rate cut pricing, and safety bid due to regional banking concerns also underpinned. NFP jobs data is the next focus, and market remains positioned for a strong number which could suggest sensitivity to a miss. The slide in AUD may have room to run as RBA path is repriced, while GBPUSD could find it hard to rally despite BOE’s pushback.
As expected, the FOMC left the target range for the fed funds rate unchanged at 5.25% - 5.50% at the January meeting. Even with an explicit removal of the tightening bias, Fed Chair Powell walked a tightrope and offered a pushback on rate cut expectations. As such the markets came out of the meeting being more unsure of the March rate cut than before.
The statement was balanced out to remove a tightening bias as it removed reference to determining the “extent of any additional policy firming”, and replaced it with “any adjustments to the target range for the fed funds rate”. This served as an acknowledgement that the probability of rate hikes vs. rate cuts is more balanced now compared to a bias towards tightening earlier. However, the statement also added that while employment and inflation goals are “moving into better balance” they don’t think it would be “appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent”. This served as a pushback to dovish bets, while worth noting that it is also a confirmation that the Fed will be happy to see inflation moving “towards” 2% rather than waiting until it is below their target.
Overall, the meeting served to pushback on increased March rate cut pricing that came on the back of some regional bank tremors earlier in the session, but on the whole odds of a March rate cut are still seen at about 37%, just a notch below 40% seen a day before (pre-regional bank headlines on Wednesday). However, US dollar got some additional factors to remain bid in the last few sessions beyond US exceptionalism and high yield, including:
Focus now turns to US jobs data out tomorrow, and a primer on this covering the data points to watch and what could the numbers signal can be found here. Consensus expects headline jobs of 185k in January from 216k in December. While ADP yesterday showed a slower-than-expected job growth, it is not usually a good predictor of NFP. Jobless claims for the survey week fell to an over 2-year low, but a cold snap in the month could have taken a toll. Recent months have seen a tendency that job growth outpaces consensus expectations, however it is worth looking at private payrolls which slowed to a 3-month average of 115k last month.
The re-ignition of banking sector concerns and Fed’s data-dependent approach still mean that the bar for dovish repricing may not be too high. If NFP comes in below expectations after months of beat, that could hurt the dollar’s recent gains, but USD still remains a buy on dips. A strong number will re-affirm US exceptionalism, and dollar is likely to extend gains. As noted here, February is a seasonally strong month for the USD.
As we noted here and here, Aussie Q4 CPI was a key catalyst to watch for a dovish RBA repricing. Ahead of the release, markets only expected 50bps of rate cuts from RBA this year as compared to the Fed’s 140bps. Q4 CPI out yesterday came in below expectations at 0.6% QoQ (prev: 1.2%, exp: 0.8%) and 4.1% YoY (prev: 5.4%, exp: 4.3%). Trimmed mean measures also surprised to the downside, raising concerns over the outlook of demand after retail sales and imports disappointed earlier in the month. Market is already increasing its bets on the RBA rate cuts and 67bps of rate cuts are priced in now compared to 50bps pre-CPI. But there is more room here, especially with RBNZ pricing at 82bps for this year and Bank of England’s at 112bps.
AUDUSD is approaching test of a critical level at 0.6522. AUDJPY pierced below 100DMA at 96.312 and is now testing 96 handle as AUDNZD tests 1.07. A break of these could bring a additional pressure for AUD. Also worth keeping GBPAUD on a watch today, with Bank of England likely having more room to pushback on easing expectations after Fed and ECB did the same.
After Fed and ECB’s recent pushback to Q1 rate cuts, focus is on Bank of England today and there is room for a stronger pushback there. However, market has priced that in with GBP seeing the least losses against the USD in the G10 space year-to-date as shown in the chart below. Cable needs to break above 1.28 to establish an upside trend, but any indications of dovish shifts in economic projections or vote split today will limit the case of a hawkish surprise today. Sterling also remains closely tied to equity sentiment, which is at the mercy of the earnings announcements for now. Risk reward remains tilted towards a downside in sterling.
EURGBP setup may still be interesting, especially if Eurozone CPI surprises to the downside and raises hard-landing concerns after France and Germany CPI came in below expectations. Break of 0.8520 in EURGBP could put the focus on 2023 low of 0.8493.
Other recent Macro/FX articles:
30 Jan: USD remains a tough sell even with a dovish Fed outcome
29 Jan: Weekly FX Chartbook: Earnings and geopolitics to take the focus away from Powell
25 Jan: US PCE Preview: March rate cut bets could pick up again
24 Jan: Markets could start to price in a Trump presidency
24 Jan: ECB Preview: Will EUR pay heed to the pushback to April cut expectations?
23 Jan: Podcast: Central banks and key figures run the show
22 Jan: Video: The Curious Investor - Q1 2024 FX and Commodities Outlook
22 Jan: Weekly FX Chartbook: Soft-landing hopes and US exceptionalism will remain at play
19 Jan: A reality check on Bank of Japan’s policy normalization and JPY appreciation expectations
15 Jan: Weekly FX Chartbook: UK data will be a test of GBP resilience
12 Jan: Markets ignore CPI uptick, Mideast tensions could fuel haven and oil-related FX
9 Jan: FX Quarterly Outlook: High yielding currencies will start to lose their appeal
9 Jan: US CPI Preview: Markets could be sensitive to an upside surprise
8 Jan: Macro and FX Podcast: Upcoming US CPI figures, USD momentum, and musings on China
8 Jan: Weekly FX Chartbook: Room for tactical gains in USD
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy