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Forex today: bid-up dollar on hawkish FOMC rolls over on trade war angst

FX today was volatile and traders homed in on the FOMC and finally responded to trade war threats, turning the marks risk-off, offsetting the hawkish tone of the FOMC and taking pulling the bid out of the dollar where it weakened against most G10 currencies. As well telegraphed, the FOMC raised the target range for the federal funds rate to 1.75-2.00% from 1.50-1.75% and also raised its forecasts in the dot plot by a single dot, (where the median projection now implies 4 hikes in 2018 instead of 3 hikes as in the March SEP), while also acknowledging an improved outlook for the US economy. 

"It seems that the fourth hike for 2018 is still hanging in the balance with only a minimal majority for the 4+ crowd among all participants,"

analysts at Rabobank argued. 

The key takeaways are:

  • Projection is for 2.4% from 2.1% last with 4 rate hikes in 2018. 
  • The Fed Sees 3 hikes in 2019 to 3.1% from 2.9%.
  • The Fed has raised their GDP outlook to 2.8% from 2.7%.
  • The Fed has lowered their unemployment to 3.6% from 3.8%.
  • The Fed sees core PCE by the end of 2018 at 2.0% from 1.9%.  
  • The Fed sees PCE inflation at 2.1% from 1.9%.

In terms of yields, the 2Y U.S.-Japan spread was retracing its decline from mid-May while the ten years were up 0.88% in between the day's range of 2.945 - 3.006%, currently at 2.97%. The two years were up 1.45% at 2.5860% within the day's range of 2.524 - 2.603%. The DXY traded between 93.52 - 94.03. On the data front, producer priced surprised to the upside in May at 0.5% m/m, pushing PPI inflation to 3.1% y/y from 2.6% in April (market: 0.3%, 2.8%).

Currency action

The single currency firstly dropped heavily on the FOMC announcements, making a low of  1.1725 before the dollar's tailspin lower sending the single currency back to test the descending resistance around 1.18 the figure. Meanwhile, the euro paid little attention to the weak EZ IP number as traders instead look ahead to the ECB meeting for QE guidance. 

GBP/USD was behaving in s similar fashion after the FOMC announcements, falling to a low of 1.3318 before rallying back to 1.3383 and closed at 1.3377. In the European markets, cable was soft on the CPI data arriving at 2.4% vs 2.5% Y/Y where the price moved in on 1.33 the figure as traders figured that the data was too soft for a rate hike from the BoE in August.  For the cross, 0.8000 was traded on the release of the FOMC outcome before the euro rallied harder than cable taking the cross 20 pips higher for a close of 0.8815. The bulls are out for a piece of the action in Thursday's ECB meeting, anticipating a hawkish tilt on the back of ECB's Peter Praet, chief economist of the European Central Bank, when he made a pioneering speech when he confirmed Thursday's policy meeting will be pivotal for reaching a decision on when to end the institution’s bond-buying program.

USD/JPY bulls were in charge leading into the FOMC meeting, edging up the scales of the 110 handle to a high of 110.72 from 110.36 in London. The pair then traded at 110.84 as Treasury yields rebounded, testing out the descending resistance once again. However, the ten years yields struggled at the psychological 3% and the dollar turned offered further into the price action and during Powell's presser, (during the Q&A at the press conference Chairman Powell said that most participants did not change their rate projections/less hawkish). There was also news mixed into today's FOMC event that the US will follow through with tariffs on $50bn in Chinese imports as soon as this Friday, raising the stakes in a potential trade war. Subsequently, the yen turned bid and USD/JPY was back to 110.26 for a close of 110.33.

The loonie was propped by a bid in oil, rallying vs the dollar form 1.3024 down to 1.2954 before the Fed. USD/CAD then rallied to 1.3051 and was unable to crack that resistance, settling down to 1.2985 the close on dollar weakness. As for the Aussie, the Fed noted the strength of the US economy and lifted the dot plots, sending the AUD/USD back onto the defensive, capping the bull's corrective attempts to the 0.76 handle, clearing the  21-D SMA/ daily cloud base and traded at a low of 0.7529. The tables then turned and the Aussie managed a bid back to 0.7580 for a close of 0.7571. The kiwi was little net changed, after a volatile time between the wide 0.7053-0.6975 range. 

Key notes from US session

Key events in Asia

Analysts at Westpac offered their outlook for today's key evenst in Asia as floows: "Australia’s May labour force data is due at 11:30am Syd/9:30am Sing/HK. The median forecast on Bloomberg is for a similar report to April, with jobs up 19k (vs +23k) and the unemployment rate edging down from 5.6% to 5.5%. Westpac’s forecasts are similar: 17k on total employment, 5.5% unemployment rate, assuming the participation rate is steady at 65.6%. This would see annual jobs growth ease from 2.7% to 2.6%, as the pace of job creation normalizes following the 2017 burst."

"China releases May activity data at 12pm Syd/10am local. This includes retail sales and fixed asset investment but we will be more interested in industrial production. Consensus is for the acceleration from 6.0%yr in March to 7.0%yr in April to be sustained."

Author

Ross J Burland

Ross J Burland, born in England, UK, is a sportsman at heart. He played Rugby and Judo for his county, Kent and the South East of England Rugby team.

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