The dollar initially sold off on the FOMC statement, but then rallied on what was overall a hawkish press conference. There were many ways to read the press conference, but one interpretation is that Chair Powell was trying to shift the narrative away from how fast the Fed would be hiking towards how high the terminal rate would have to go and how long it would have to stay there. The press conference also concluded with a sense of frustration from Chair Powell that inflation had not fallen more quickly. With the focus now switching to the terminal rate, Chair Powell has guided expectations that it will be higher than the 4.50-4.75% area the Fed had estimated back in September. That could prepare us for another bullish dollar event risk with the release of the next set of projections on 14 December - assuming neither employment nor core inflation drops. For today the focus will be as usual on the weekly jobless claims data. We also have ISM services and the September trade balance. The US monthly trade deficit has narrowed in from $107bn to $67bn this year, no doubt helped by rising US energy exports. Another dollar positive.
Falling equities and an aggressive Federal Reserve weighed on the Canadian dollar yesterday. The loonie weakened in yesterday’s trading session and is now trading just shy of the 1.38 level. A move above the CAD1.3850 area would suggest that the pair will target the 1.40 psychological level. Direction for the CAD is likely trade on broader market themes. Observe the USD/CAD trends.
The jump in US rates has widened the two-year differential between EUR and USD swap rates back to 210bp again - not far from the widest levels of the year. Equally, the shorter-dated yields now indicate that it will cost euro-based companies around 3% per annum to hedge the dollar using three-month forwards - that is expensive. EUR/USD is gradually sinking back towards 0.98 and we feel momentum could easily build for a push to 0.9650 tomorrow if US jobs and wage data print as expected. In Europe today, there are a lot of European Central Bank speakers. EUR/USD could trade in a 0.9760-0.9850 range today.
Today is BoE day and market consensus suggests that the bank will hike interest rates by 75bp. The FX market attaches a 150 pip GBP/USD range to today's event risk. We could see GBP/USD trading back to the 1.1250 area should the BoE disappoint. Sterling also looks challenged from both: i) the international investment environment where US equities sold off 2.5% yesterday on the prospect of higher for longer Fed rates and ii) what is shaping up to be quite a tight fiscal event in the UK on 17 November as the new government struggles to plug its borrowing gap