The dollar is weaker across the board after yesterday’s FOMC meeting. One could be forgiven for thinking this was a dovish hike given the market reaction. The catalyst for the move seems to be Powell's remarks in his press conference that 75bp increment adjustments were not on the table. Despite the 1% correction in the dollar, US interest rate markets have not really moved that much. Pricing of the Fed projected rate in 2023 has come 10-15bp off its highs, but at 3.20% is still higher than it was a few weeks ago. A sustained decline in the dollar would require confidence that the Fed can deliver an orderly tightening cycle, taking the steam out of the US economy and delivering a soft landing. It seems far too early to make that call given the lingering fears of inflation and the risks. Observe the foreign exchange rates.
CAD - Canadian Dollar
The CAD has dropped to the mid- 1.27’s this morning – a move lower than we thought might develop yesterday. The weakness in the USD after the FOMC meeting has effectively given the green light for a little more CAD appreciation in the short run. Based on generally firm commodity prices, resilient growth and a hawkish central bank, we think CAD gains, are deserved. Earlier this week BoC SDG Rogers stressed that monetary policy would need to be tightened further. Still, the influence of external factors—equity market volatility, the broader USD tone, etc.—is not going away any time soon so expect significant volatility in the FX markets in the short term. Over the medium term, expect the CAD to maintain some modest strength given the strong domestic fundamentals.
EUR - Euro
EUR/USD has participated in the dollar sell-off, but we think there is a chance that the rally stalls ahead of the 1.0650 area. It seems too early to position for the type of orderly Fed policy normalization which would create benign conditions for the global risk environment. The EU is close to agreeing on a Russian oil embargo, which will hit growth prospects. The balance of risks suggests it is hard to make the case for a meaningful EUR/USD rally.
GBP - British Pound
It is a big day for UK monetary policy, where the Bank of England is expected to hike 25bp to 1.00%. It is probably a little too early to look for a hard sell-off in sterling on today's meeting, but volatility looks assured.
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