Article / 15 June 2017 at 7:31 GMT

FX Update: USD all over the map after less dovish Fed — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Overall impression of FOMC was less dovish than expected
  • Fed plans to launch QT (quantitative tightening) this year if US data improves
  • QT set to start with $10 billion/month split 60/40 between treasuries and MBS 
  • Dot plot was almost totally unchanged; Fed is on course for one more hike in 2017
  • Fed cut 2017 inflation forecasts, trimmed jobless forecasts only slightly
  • USD direction from here could depend mor on long US rates than on the Fed
USD bills
 The US dollar was all over the place. Photo: Shutterstock

By John J Hardy

There were few real takeaways from Wednesday's Federal Open Market Committee meeting, though the overall impression was more hawkish than the market's dovish expectations going into the meeting. 

The monetary policy statement brought a few minor tweaks, while most of the news was in the accompanying materials, including a brief document describing how the Fed plans to launch QT (quantitative tightening – why hasn’t this expression caught on more? It is more efficient to say than “unwinding the Fed’s balance sheet”). 

QT is set to begin “this year” if the US data improves, and will start with $10 billion/month divided 60/40 between US treasuries and mortgage-backed securities, with $10 billion/month increases every three months. 

It was no surprise to see the Fed pulling 2017 inflation forecasts sharply lower, while the unemployment rate forecasts were only lowered slightly (a slight dovish nod there) despite the recent strong drops in the jobless rate. The dot plot was almost totally unchanged, suggesting the Fed is on course for one more rate hike later this year and four (!) more next year together with QT. If the market believed this guidance, the USD would not be trading here.
The market was poorly prepared, after the earlier weak US data, for the lack of a firmer tack to the dovish side from the Fed, and the energetic USD selloff that had developed earlier in the day on the bad US May CPI and May retail sales releases reversed. Looking out at the various US interest rate indicators, these continue to show that the market is strongly second-guessing the Fed’s dot-plot forecast, which will make the market highly reactive to more positive US data, if that is what we see from here. 

The Citi index of US data surprises is very negative at near -57, and it is a data series that tends to mean revert eventually. But it is difficult to get an overall read on the USD here, and the Fed may matter less than the direction of US interest rates, particularly at the long end (lower = weaker USD), as we watch whether the break to new lows for the cycle in the 10-year yield holds. There is also an overall disappointment in the lack of a "Trump trade" as the establishment and Trump’s own self-destructive behaviour are doing everything to keep him sidelined.


EURUSD ended the day unchanged after the pump and dump of weak US data/less dovish FOMC. It is a classic shooting star-style formation, and we have bearish momentum divergence as well. But for this to result in a follow-through move lower, we may need to see supportive developments from US yields, as much of the action was driven by data releases before the FOMC meeting. Bullish above 1.1275 and bearish below perhaps 1.1175.
Source: Saxo Bank
The G-10 rundown

USD – USD is trying to recover from yesterday’s lows, but yields are largely unchanged, and the market is showing signs of thumbing its nose at the Fed’s forward guidance. So not entirely sure of the near-term direction potential, and defaulting to watching US yields.

EUR – passive to developments elsewhere and the general direction of the USD. A new approach to highs after yesterday’s pump and dump in EURUSD would be bullish.

JPY – watching that US 10-year yield, which is stuck a bit lower than the USD and is especially critical for USDJPY. Note Bank of Japan overnight, though we have few expectations.

GBP – the theme of weak UK data relative to the EU dominates. This is to be tested today by UK retail sales. Brexit talks are set to get underway on Monday. I suspect that Brexit could just get more and more bogged down and end in another referendum down the road and possibly even a “Bremain”. Meanwhile, the Bank of England today may not have much, if anything, to add. A weak currency is helpful as long as it isn’t too weak or inflation too high.

CHF – There was an interesting bounce in EURCHF yesterday ahead of today’s Swiss National Bank meeting. Does someone know something? We see no surprises from SNB today, but if yields pick up generally, CHF may weaken.

AUD – a very strong jobs report overnight on the strong growth in full-time payrolls. It has been felt more in the crosses than in AUDUSD, but AUDNZD may have built a base now.

CAD – very weak oil prices are not supportive, and USDCAD ran a bit too far too fast, but the range to 1.3000 is open if the USD can’t pull itself together.

NZD – a miss on GDP sees the overdone kiwi rally back a couple of notches, but it will take some doing to turn the momentum unless there is a shift in risk appetite.

SEK – falling asleep again as we scratch around for what will move the needle.

NOK – NOK wants to rally, but oil not cooperating.

Upcoming Economic Calendar Highlights (all times GMT)
0730 – Swiss National Bank meeting
0830 – UK May retail sales
1100 – UK Bank of England meeting
1100 – Turkey Central Bank decision (LLW)
1230 – US June Empire manufacturing and Philadelphia Fed surveys

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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