US Dollar Slides as Fed Outlook Weighs on Sentiment
The United States (US) dollar headed lower against its major trading partners early Thursday ahead of a quiet day that features weekly initial jobless claims and natural gas stocks.
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, Francesco Pesole, ING Economics FX Strategist said in a note to its clients.
On Thursday, European and US equity futures point to positive open, and high-beta currencies are in demand. Analysts said this might be a sign that markets are seeing this moment as the peak in the Fed’s hawkish communication and are now eyeing opportunities to re-enter short-USD pro-cyclical positions at more attractive levels.
“However, there is still some room for USD rates to absorb further hawkish repricing in rates expectations, and the rebound in risk currencies may be premature”, ING said in its notes to clients.
Markets are pricing in a 5.13% Fed peak rate as of this morning, so still not fully factoring in another hike beyond March, according to Pesole, noting that around 50bp of easing in the second half of the year remains in the price, which reflects both disinflation and recession risks in the US.
Probably, the aim of hawkish Fed speakers at this stage is to convince markets that rates can go at least to 5.25% or that rate cut speculation is misplaced.
“… 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”.
Meanwhile, there are no appearances by Federal Reserve officials scheduled for Thursday after Wednesday’s full slate. Recent comments have suggested the Fed will remain on a tightening path and could lift the federal funds rate higher and keep it there for longer than previously expected.
A quick summary of foreign exchange activity heading into Thursday showed that EUR-USD rose to 1.0763 from 1.0714 at the Wednesday US close and 1.0737 at the same time Wednesday morning.
The German consumer price index rebounded in January, data released overnight showed, while consumer sentiment improved in February in Spain and Italy but declined in Germany and France.
GBP-USD rose to 1.2148 from 1.2071 at the Wednesday US close and 1.2101 at the same time Wednesday morning. There are no UK data on Thursday’s schedule. The next Bank of England meeting is scheduled for March 23.
USD-JPY fell to 130.8744 from 131.4470 at the Wednesday US close and was only slightly above the 130.7811 level at the same time Wednesday morning. The Japanese money supply rose less than expected in January, data released overnight showed. The next Bank of Japan meeting is scheduled for March 9-10.
USD-CAD fell to 1.3407 from 1.3447 at the Wednesday close but up from 1.3381 at the same time Wednesday morning. There are no Canadian data scheduled for Thursday. The next Bank of Canada meeting is scheduled for March 8. # US Dollar Slides as Fed Outlook Weighs on Sentiment
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