(Giles Coghlan LLB, Lth, MA – HYCM)
On Sep 21 the Fed hiked by 75 bps to 3.00-3.25% and Jerome Powell delivered a significant hawkish message expanding the terminal rate to 4.6% for 2023, up from 3.8% prior. Powell affirmed the dot plot in his statement by saying that it is likely that rates will get to levels in the Dot Plot. This was a hawkish statement and that kept the USD bid.
The following morning the Swiss National Bank met and it hiked interest rates by 75bps. However, Short Term Interest Markets (STIR) had priced in a nearly 100% chance of a 100bps hike. This meant the CHF sold off heavily on the decision and sent the USDCHF sharply higher.
This divergence should favour USDCHF upside in the near term with a divergence in the central banks’ move relative to the market’s pricing for their rate decisions.
Major trade risks: The major risk here is if the SNB or the Fed makes any significant announcements that change this outlook.
Fed: Peak bullish message for the USD
The Fed hiked by 75 bps to 3.00-3.25% as expected and with the expectation set high coming into the latest FOMC meeting the Fed needed to affirm the terminal rate of 4.5% set by STIR markets to keep the bullish sentiment going around the USD. In the event, Jerome Powell delivered a significant hawkish message expanding the terminal rate to 4.6% for 2023, up from 3.8% prior. Powell affirmed the dot plot in his statement by saying that it is likely that rates will get to levels in the Dot Plot.
This was a hawkish statement and that kept the USD bid. However, where does the USD go from here? On one hand, we can see the Fed keeping the hawkish messaging supporting the USD, but on the other hand, this seems to be the peak for the USD. With the terminal rate expectations of both STIR markets and Fed pricing the same there would need two be a fresh catalyst for more USD strength. So, at this point, it would seem reasonable for the USD to peak. Who is left to buy the USD and with what expectations?
It is possible that risk-off sentiment from Russia/Ukraine risk can keep the USD bid. We could also see firmer inflation from the US that would perhaps see the terminal rate inch up towards 5%. However, this seems a tough order. So, we might be close to peak USD. Timing is always the issue though and incoming data will be key, so be nimble and flexible.
GBP attempts to recover from historic lows
(XTB Analysis Team)
The British Pound is making headlines today due to a massive crash seen by the currency. The pound has been in freefall since Friday, following the announcement of new expansionary fiscal measures, including the largest tax cuts in decades. While these measures are aimed at stimulating economic growth, there are concerns about financing them as well as their impact on inflation. The GBPUSD (cable) pair experienced a flash crash this morning, dropping as much as 4.5% at one point of the Asian session with the pair dropping below 1.0350, the lowest level on the record. This situation is not limited to the US dollar as moves on other GBP-tied FX pairs were also massive. However, GBP managed to bounce off the daily lows and in some cases, like for example GBPJPY, the downward move was almost completely erased. The British Pound is the worst performing major currency today and while we have seen a general weakness of majors against the US dollar in recent weeks, with EURUSD remaining below parity, this reaction by the pound is concerning and could prove to be an omen of what’s to come for the currency as traders look for safer choices while they remain uncertain about how the BoE and government will attempt to deal with this situation while the risk of reaching parity with the dollar becomes an increasingly likely possibility.