In spite of the market expecting a hawkish outcome yesterday, the dollar managed to rally 0.5-1.0% after last night's FOMC decision and a very hawkish set of Fed projections - both for inflation and the monetary policy response. The market pushed the terminal rate expectations some 15bp higher - now seen at 4.65% in May 2023. For today, a myriad of rate meetings around the world will remain the focus. Expect the dollar to remain bid on dips as confidence grows that deposit rates for the world's most liquid currency will push above 4% over the coming months.
The CAD sell-off yesterday extended more than 1%. Funds neared 1.3550 overnight before steadying at 1.375 to start the day. Short-term US-Canada spreads have swung sharply in the USD’s favor following the inflation report and yesterday’s hawkish FOMC comments. CAD weakness largely reflects 1) the broader USD tone and 2) risk aversion. These factors will continue to largely shape CAD trading over the coming weeks.
EUR/USD continues to grind to new lows of the year. Yield differentials have not been playing a big role in EUR/USD pricing and the current rates are more a function the overall environment. The Fed is leading the world's major central banks into more hawkish policy settings and making recessions more likely. As a relatively open economy with a large manufacturing base - and a war on its doorstep - the eurozone faces some major challenges this winter. In addition, the eurozone ran close to a EUR20bn current account deficit in July - a huge swing from traditional surpluses. The EUR/USD is likely to continue to grind lower to the 0.9650 area over coming weeks.
The Bank of England is widely expected to hike 50bp today. The hawkish BoE has provided little support to the GBP this summer. Instead, fiscal concern is growing in the UK and tomorrow's 'fiscal event' could prove the trigger for another round of sterling selling. GBP/USD is likely to continue grinding towards 1.10.
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