– FOMC surprises with hawkish rate projections.
– ECB meeting ahead-25 bp rate hike widely expected.
– US dollar trading with mixed note, AUD outperforms.
USDCAD snapshot: open 1.3320-24, overnight range 1.3322-1.3353, close 1.3323, WTI $68.99, Gold $1936.19
The Canadian dollar drifted higher leading up to the FOMC meeting yesterday, only to sharply retreat after the outcome proved more hawkish than anticipated.
As expected, the FOMC decided to keep interest rates unchanged, with Fed Chair Jerome Powell having previously hinted at such a move during the previous FOMC meeting. Nevertheless, this break from the past ten meetings where US rates saw increases does not indicate an end to the tightening cycle.
Notably, the dot-plot projections put forth by policymakers showcase their aggressive stance on rate hikes. While they project two additional rate increases in 2023, three members believe that three or more hikes may be necessary.
Despite these projections, traders remain unconvinced, as indicated by the CME FedWatch tool, which only prices in one rate increase for 2023.
The US dollar initially rallied but ultimately closed on a mixed note.
Today, market attention has shifted towards the European Central Bank meeting and the subsequent press conference by President Christine Lagarde.
EUR/USD is currently consolidating recent gains within the 1.0805-1.0848 range. It is widely expected that the ECB will raise rates by 25 basis points and hint at the likelihood of further rate hikes. However, this expectation is already priced into the EUR/USD exchange rate. For the euro to avoid a decline towards 1.0700, policymakers must present a more hawkish stance compared to the Federal Reserve.
GBP/USD is striving to recover its losses following yesterday’s Fed meeting. It rose from an Asian low of 1.2631 to 1.2673 in Europe before easing down to 1.2655 in early New York trading. The current price already reflects an additional 125 basis points of Bank of England rate increases, and any further gains will be constrained by the tone set during the ECB press conference today.
In response to the hawkish guidance from the Fed, higher US Treasury yields, and dovish expectations for the Bank of Japan’s upcoming monetary policy meeting, USD/JPY rallied from 139.95 to 141.50. However, JPMorgan suggests that the Bank of Japan may make adjustments to its Yield Curve Control policy.
AUD/USD demonstrated strength within the range of 0.6768-0.6827, benefiting from the latest rate cut by the People’s Bank of China and hopes for additional fiscal stimulus from the Chinese government. Additionally, stronger-than-expected Australian labor market data (75,900 actual headline employment vs. 15,000 forecast) and consumer inflation expectations (5.2% actual vs. 4.8% forecast) point to potential interest rate hikes by the Reserve Bank of Australia.
NZD/USD finds itself near the lower end of the 0.6163-0.6216 range. Prices initially rose following the FOMC announcement but declined later on after Q1 GDP figures indicated that the country had entered a technical recession. Q1 GDP experienced a 0.1% quarter-on-quarter decline, following a 0.7% drop in Q4 GDP.
Today’s US data includes weekly jobless claims, the Philadelphia Fed Manufacturing Index, and Retail Sales.