USD and GBP analysis and talking points
Peak of the US dollar?
After a quiet start to the week following yesterday’s holiday in the US, the US dollar became much softer this morning, falling below 104 as the Euro bounced back from 1.05, while the Pound broke 1.23. Now, while the US dollar will benefit from safe haven flows, as stocks begin to stabilize, there is a risk that the US dollar will continue to drift lower as the factors that supported the US currency begin to decline.
After last week’s sudden rally from the SNB, I think we have started the shift from monetary policy divergence, which was a supportive factor for the US dollar, to monetary policy convergence. Aside from the Swiss National Bank, the European Central Bank will raise interest rates from next month, while also looking to announce an anti-retail tool. Elsewhere, the Reserve Bank of Australia, the Reserve Bank of New Zealand and the Bank of England moved aggressively, while the Bank of England signaled its willingness to act more aggressively (despite its lukewarm actions). The view of monetary policy coverage weighing on the dollar will be clearer if the BoJ moves away from its ultra-loose policy, and while we are not there yet, Japanese officials have indicated their discomfort with the rapid depreciation of the Japanese yen.
Bond tightening spreads to put pressure on the US dollar
Looking ahead, Fed Chair Powell’s testimony will be among the major risk events. However, after a leak last week to the Wall Street Journal to pre-warn markets about 75 basis points two days before the Fed meeting (during the blackout) following the latest inflation numbers, I would argue that it would be better to follow the data on the Fed talk Federal. However, the Fed chair is likely to repeat his hard-line message.
Elsewhere, the final US state of Michigan inflation expectations survey scheduled for Friday will increase in importance after President Powell’s frank mention of the data at his latest press conference.
“So the Michigan initial reading, it’s a preliminary reading, may be revised, and yet it was very eye-catching and we’ve noticed. We also noticed that the Board’s Common Inflation Expectations Index rose after being flat for a long time, so we’re watching that and believe that’s something we should take seriously. This is one of the factors as I mentioned. One factor in our decision to go forward with 75 basis points today was what we saw in the inflation expectations“
Sterling reaction function may change after BOE directive change
The latest BoE policy meeting saw the MPC change its forward guidance once again, which in turn could see a change in the GBP’s reaction to tomorrow’s CPI report. The MPC has now toughened its stance a bit on hiking, noting that it will “act more aggressively” if inflation pressures prove more persistent, in contrast to the earlier statement that further tightening may be appropriate. Therefore, we may actually see the pound rally in case inflation rises above expectations.
Bank of England forward guidance
December 16: Some modest tightening of monetary policy during the forecast period is It may be necessary To sustainably achieve the 2% inflation target
March 16: More modest tightening in monetary policy may be suitable In the coming months
June 16The size, speed, and timing of any further bank rate increases reflect the Committee’s assessment of the economic outlook and inflationary pressures. The Committee will pay special attention to indications of continued inflationary pressures, and If necessary, act aggressively as a response.
Sterling’s reaction to the UK CPI
Source: Refinitiv, Bloomberg, DailyFX