FX Update: Market thumbing its nose at central banks.
Summary: The ECB is the latest central bank to suffer the market second guessing its intentions as rate hike bets for next year rose to cycle highs even as ECB President Lagarde pushed back against the market pricing these rate moves. The Euro rose in response, with EURUSD trading above local resistance, but we have a critical week ahead for the US dollar as next week features a busy economic calendar and an important FOMC meeting.
FX Trading focus: Market thumbs nose at ECB. what happens next week with FOMC?
At the ECB press conference, ECB president Lagarde insisted that the bank’s forecasts and outlook suggest that, while inflation will prove more persistent than originally expected, it will fall back next year and that the market’s pricing of ECB rate hikes next year was unwarranted. Even as she did so, rate expectations actually rose sharply while she was speaking during yesterday's press conference, suggesting two things: first, that the market believes that the ECB will have to cave in recognition of inflationary risks and adjust its inflation forecasts significantly higher at the December meeting after projecting in September that inflation would fall back to 1.7% in 2022 and 1.5% in 2023. Second, it is part of the pattern of late in which the market is sharply readjusting rate expectations higher with or without an accompanying guidance shift from a central bank. The three most prominent examples this week have been in Australia (discussed below), the huge shift in Canadian short rates after the Bank of Canada’s hawkish turn, and now the ECB even with the bank actively pushing back against what the market is pricing.
Given that the EURUSD rushed higher in response to yesterday’s ECB meeting as discussed in the EURUSD chart analysis below, the question now is to how the market treats the US dollar over the various US data releases from today (PCE inflation) through next Friday (October jobs report), not to mention the Wednesday FOMC meeting next week that will mark the start of an overdue QE taper. Will the market continue to price the Fed to remain behind the curve relative to what is being priced in elsewhere from other central banks. And even if so, will US treasury yields stay suppressed at the long end of the curve even if short rates continue to rise? If US 10-year and longer yields punch higher to new cycle highs, the volatility risks across asset classes should pick up considerably. Risk off and higher US long yields are perhaps the last route for the US dollar to take a stand. Either way, the US dollar is in a very pivotal spot in a number of pairs ahead of the crucial week ahead.
RBA has loudly not responded to YCC challenge. In Wednesday’s update, I noted that the market was challenging the RBA guidance in the wake of the strong-ish core CPI release, but of course the technical event that precipitated such a powerful change of sentiment in Aussie rates (if less so the currency) was the market directly challenging the RBA’s actual yield-curve-control policy, under which it is supposed to be keeping the April 2024 Australian Government Bond pinned at 0.10%. That yield level was challenged lightly last week, but gave way on Wednesday and flew higher yesterday to above 0.50% and overnight to above 0.75%. This sets up a very pivotal RBA meeting next Tuesday at which the RBA at minimum will need to wiped egg off its face and climb down from the yield target. To meet market expectations, it would also have to loosen up its forward guidance on the expected time frame of hiking rates, but the mood of the market seems to be one of ignoring forward guidance, anyway. AUDUSD is at critical levels as well, trading up against the 200-day moving average overnight near 0.7560, which is also near the range lows that were broken in the wake of that pivotal June FOMC meeting, so next week is critical for whether the pair can achieve a full reversal back into the higher zone.
Chart: EURUSD
Very tempting to get bullish of EURUSD on the close yesterday due to the close above the tactical resistance levels into 1.1665+ , but with the gauntlet of event risks through next Friday that we note above, the bulls will need to prove that this move can stick, and a weak close today south of perhaps 1.1625 would leave us in limbo or even looking tactically lower heading into next week. A 1.1700+ hold after the FOMC next week would certainly help offer up more confirmation that yesterday’s move meant something.
EURCHF, a traditional risk barometer, is an odd one out as the market aggressively reprices central banks to hike rates and risk appetite has been strong until late yesterday, at least. Note that USDCHF slipped below its 200-day moving average yesterday and that the EURCHF pair is now working down into the last bits of its range ahead of the cycle low near 1.0500, where the defense against further CHF strengthening is likely to stiffen significantly from the SNB.
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FX Trading focus: Market thumbs nose at ECB. what happens next week with FOMC?
At the ECB press conference, ECB president Lagarde insisted that the bank’s forecasts and outlook suggest that, while inflation will prove more persistent than originally expected, it will fall back next year and that the market’s pricing of ECB rate hikes next year was unwarranted. Even as she did so, rate expectations actually rose sharply while she was speaking during yesterday's press conference, suggesting two things: first, that the market believes that the ECB will have to cave in recognition of inflationary risks and adjust its inflation forecasts significantly higher at the December meeting after projecting in September that inflation would fall back to 1.7% in 2022 and 1.5% in 2023. Second, it is part of the pattern of late in which the market is sharply readjusting rate expectations higher with or without an accompanying guidance shift from a central bank. The three most prominent examples this week have been in Australia (discussed below), the huge shift in Canadian short rates after the Bank of Canada’s hawkish turn, and now the ECB even with the bank actively pushing back against what the market is pricing.
Given that the EURUSD rushed higher in response to yesterday’s ECB meeting as discussed in the EURUSD chart analysis below, the question now is to how the market treats the US dollar over the various US data releases from today (PCE inflation) through next Friday (October jobs report), not to mention the Wednesday FOMC meeting next week that will mark the start of an overdue QE taper. Will the market continue to price the Fed to remain behind the curve relative to what is being priced in elsewhere from other central banks. And even if so, will US treasury yields stay suppressed at the long end of the curve even if short rates continue to rise? If US 10-year and longer yields punch higher to new cycle highs, the volatility risks across asset classes should pick up considerably. Risk off and higher US long yields are perhaps the last route for the US dollar to take a stand. Either way, the US dollar is in a very pivotal spot in a number of pairs ahead of the crucial week ahead.
RBA has loudly not responded to YCC challenge. In Wednesday’s update, I noted that the market was challenging the RBA guidance in the wake of the strong-ish core CPI release, but of course the technical event that precipitated such a powerful change of sentiment in Aussie rates (if less so the currency) was the market directly challenging the RBA’s actual yield-curve-control policy, under which it is supposed to be keeping the April 2024 Australian Government Bond pinned at 0.10%. That yield level was challenged lightly last week, but gave way on Wednesday and flew higher yesterday to above 0.50% and overnight to above 0.75%. This sets up a very pivotal RBA meeting next Tuesday at which the RBA at minimum will need to wiped egg off its face and climb down from the yield target. To meet market expectations, it would also have to loosen up its forward guidance on the expected time frame of hiking rates, but the mood of the market seems to be one of ignoring forward guidance, anyway. AUDUSD is at critical levels as well, trading up against the 200-day moving average overnight near 0.7560, which is also near the range lows that were broken in the wake of that pivotal June FOMC meeting, so next week is critical for whether the pair can achieve a full reversal back into the higher zone.
Chart: EURUSD
Very tempting to get bullish of EURUSD on the close yesterday due to the close above the tactical resistance levels into 1.1665+ , but with the gauntlet of event risks through next Friday that we note above, the bulls will need to prove that this move can stick, and a weak close today south of perhaps 1.1625 would leave us in limbo or even looking tactically lower heading into next week. A 1.1700+ hold after the FOMC next week would certainly help offer up more confirmation that yesterday’s move meant something.
EURCHF, a traditional risk barometer, is an odd one out as the market aggressively reprices central banks to hike rates and risk appetite has been strong until late yesterday, at least. Note that USDCHF slipped below its 200-day moving average yesterday and that the EURCHF pair is now working down into the last bits of its range ahead of the cycle low near 1.0500, where the defense against further CHF strengthening is likely to stiffen significantly from the SNB.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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