Similar to what had happened in the aftermath of six of the previous eight FOMC announcements, a “sell-the-fact” dollar reaction was triggered yesterday. Markets seemed to cling on to the notion that the Fed will slow down tightening, which resulted in an equities rally. Market expectations suggest another 100bp of extra tightening at the September, November and December meetings combined. Speaking of recession, Powell seemed to retain a rather optimistic approach on the topic, today’s GDP numbers will be a first test of the dollar’s reaction function to incoming data. Looking ahead, we expect the post-FOMC dollar weakness to fade. The recovery for global risk assets is long and bumpy, as the magnitude of a global slowdown remains high. Expect a heightened sensitivity to data to keep volatility high.
Although US futures are trading lower, the Canadian dollar is slightly firmer at its best level since mid-June. The US dollar is straddling the 1.28 to start the day. The CAD’s correlation with stocks/equity volatility remains soft and its relationship with crude/commodity prices generally has strengthened in recent weeks but the broader risk mood continues to shade the CAD’s performance, we feel while the CAD has not really reflected the bounce expected with commodity prices. These trends suggest some upside potential in the CAD but we expect short-term moves in the CAD will effectively be driven by external events.
EUR/USD received a bump after the FOMC and is back at 1.0200 but we don’t expect the dollar’s soft momentum to linger for much longer. This means that downside risks over the coming weeks for EUR/USD remain strong and continues to be tied to further developments on the Russian gas story. The focus will be on data releases - German CPI figures will be watched very closely ahead of tomorrow’s eurozone-wide figures and could have a quite tangible impact on the euro. On the ECB side, we’ll hear from Bank of Italy’s Governor Ignazio Visco today.
With the exception of some headlines about campaign pledges by Liz Truss and Rishi Sunak, there simply isn’t much that markets are looking at in terms of domestic drivers for GBP. The data calendar is set to be very quiet into next Thursday’s Bank of England rate announcement, ahead of which markets are pricing in around 45bp of tightening. We think GBP/USD is still at risk of a return to or below 1.2000 in the coming weeks.