After only moderately hawkish remarks by Federal Reserve Chair Jerome Powell on Tuesday, other Fed officials delivered more aggressive comments on the prospects for tightening yesterday. Christopher Waller, Lisa Cook, John Williams and Neel Kashkari all pointed at either the need for rates to go beyond 5.0% or reiterated the higher-for-longer narrative. All this prevented a recovery in risk sentiment yesterday and helped the dollar build a temporary floor. This morning, European and US equity futures point to a positive open.
It is fair to expect that more evidence from data will be required to convince markets of another 25bp after March. Jobless claims are the highlight of the day in the US today, and tomorrow’s University of Michigan sentiment index is the last piece of data in the US for the week. We think that a more patient trading environment could return after this morning’s risk-on mood and last until Tuesday’s pivotal US inflation report. In FX, it appears too early for the dollar to re-enter a sustained downtrend.
The US dollar has been capped this week in the CAD1.3460-75 area against the Canadian dollar and was successfully tested again this morning. The pair turned lower overnight and is probing support around CAD1.34 in Europe this morning. Gov Macklem’s comments earlier this week on the policy outlook gave little away; the Governor justified the decision to move to the sidelines by stating that policy makers had to avoid slowing the economy too much. The comments contrast with Fed leaving the door open to even tighter policy in the US, if needed. That contrasting policy outlook will keep the CAD tone generally defensive. Observe the USD/CAD trends.
German inflation numbers released this morning surprised on the downside. Headline CPI grew 8.7% year-on-year, lower than the forecasted 8.9%. This will probably test the ability of the European Central Bank to continue pushing back against the bullish reaction in the rates market after last week’s ECB meeting. EUR/USD may struggle to climb back to the 1.0800.
Keep an eye on Bank of England Governor Andrew Bailey as he testifies before parliament. Like in the eurozone, we have seen a good deal of hawkish commentary in the UK following last week’s BoE rate decision, and markets likely expect any policy comments today to fall on the hawkish side of the spectrum. The GBP is still likely to struggle against both the USD and the EUR given the grim economic outlook for the UK and no clear policy divergence.