The Fed looks likely to go again with a 75bp hike in July. The sharp adjustment in the dollar after Powell said that 75bp adjustments would not be common looks more a function of market positioning than any serious re-assessment of the Fed rate cycle. Powell also said he wants the policy rate at 3.00-3.50% by year-end and the Fed dots tell us that the policy rate could be closer to 4.00% by the end of 2023. With inflation proving sticky this summer, there seems no reason for the Fed to back away from this hawkish messaging over coming months. That should keep the dollar supported on dips. For today, some softer US housing starts could drag the dollar a little lower but will remain well supported over the coming months.
The recovery in the Canadian dollar that yesterday's price action gave some hope for has pretty much stalled. The US dollar was repelled after it approached 1.30 yesterday and settled a little below 1.29. The CAD is still struggling to trade on its own merits—a hawkish central bank, resilient domestic fundamentals, supportive terms of trade via generally firm commodity prices—as the risk backdrop continues to drive sentiment. However, with risk appetite drying up, the Canadian dollar is under pressure again. A push above 1.30 targets last month's high closer to 1.3075. Observe the USD/CAD chart.
EUR/USD is consolidating above the lows of the year at 1.0350/60, but developments in European natural gas markets have probably prevented a bigger rally on the back of the softer US story yesterday. The focus is on Russia cutting gas supplies to Germany and Italy by up to 60%. European natural gas jumped 30% yesterday and is a reminder of the frontline risks to Europe posed by the war in Ukraine. With gas prices on the move, EUR/USD may trace out a 1.0350-1.0500 range near term and fail to benefit as much as others from any corrective rallies in equities.
The market prices the Bank rate at 2.80% by the end of this year. Most continue to suggest that at some point there will be a 'day of reckoning' for sterling when the BoE aggressively wants to correct market expectations. Trade-weighted sterling is 5% weaker on a year-on-year basis and with inflation expected to remain high all year, the BoE may not want to trigger a further collapse in the pound. GBP/USD could be a pair to recover from a temporary lift in equity markets - potentially drifting up to the 1.2250 area.
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