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The Fed’s ambiguous communication has left rate expectations being driven no longer by Jay Powell but by Secretary Janet Yellen and her stance on extending bank deposit protection. We saw a dollar rebound yesterday, but that may not last long as the Fed emerged as a dovish outlier while European hawks took center stage. Today, PMIs may have a limited impact.
 

USD: Yellen is the new Powell

As discussed in yesterday’s FX daily, the Federal Reserve’s unclear communication may have set the stage for a dollar decline by leaving market pricing of rate expectations strictly tied to news on the banking crisis and the regional bank turmoil which is still looking unresolved in the US. At the same time, we highlighted how a further depreciation in the greenback is unlikely to look like a straight line: in an environment where news flies and changes rapidly, corrections – even of large magnitudes – is the norm.

The most obvious symptom of how the Fed has lost its grip on the market is US Treasury secretary Janet Yellen “stealing” Fed Chair Jerome Powell’s spotlight as a market driver. This happened blatantly on Wednesday when a dovish Fed hike was out-shadowed by Yellen’s backtracking on a “blanket” bank deposit insurance. Yesterday, she offered some reassurance to markets in that sense, saying: “Certainly, we would be prepared to take additional actions if warranted”. This was enough to offer some relief to market concerns on the US regional banking troubles and take some pressure off rate cut speculation and off the dollar. And it is another testament to how markets seriously struggle to see the US small bank troubles being resolved without substantial support from the government.

Ultimately, this continues to endorse our baseline bearish bias on the dollar, as a situation that neither develops into a fully-fledged systemic crisis (which would be USD positive) nor significantly improves on the US regional banking side which should keep markets betting on Fed easing later this year. At the moment, there are around 90bp of cuts priced in, starting in July, and the unclear Fed communication is doing very little to reliably push back against those.

Today, we’ll hear from Fed hawk James Bullard, and monitor PMI releases across the world. US figures are expected to stabilize around February’s levels. Anyway, data are playing a secondary role now.
 

EUR: Hawks fly high in Europe

Since the onset of the banking crisis, central banks in the eurozone (last week) and in Switzerland and Norway (yesterday) all surprised on the hawkish side. This shows how the restoration of investor sentiment has come a long way in Europe since the fear of a black-swan Credit Suisse collapses a couple of weeks ago. Here are our review notes of the SNB (50bp) and Norges Bank (25bp) rate hikes. The latter went a step further into hawkish territory as it announced another hike in May, and projected a total of 50bp of extra tightening before reaching the peak this summer. The ultimate goal is clearly to offer support to the krone and limit imported inflation.

The focus today will be on PMI readings in the eurozone today. Like in the US, expectations are for a stabilization in the survey around February’s numbers, and barring huge surprises, the releases may not have a major market impact given how macro fundamentals are playing second fiddle to financial market stress at the moment. EUR/USD pulled back after breaking above 1.0900 as the dollar staged a comeback, but we think that 1.1000 can be tested quite soon as the dollar bias should stay mostly bearish and European currencies are backed by hawkish central banks and a quieter banking environment.
 

GBP: BoE hiked but gave very little guidance

The Bank of England hiked by 25bp yesterday, which was fully in line with expectations. We only got a statement this time (no press conference), and it appears quite clear that the MPC has tried to keep all options open. We strongly suspected the BoE would refrain from offering any real bit of guidance to markets and that would have meant that the impact on the pound would have been very short-lived. This indeed appears to be the case.

Our economics team thinks that a May pause is likely despite the recent rise in inflation: with around 30bp of tightening in the price, there is room for a repricing lower to favor a modestly higher EUR/GBP. Looking at Cable, the BoE does not appear to be much of a factor, and our view for dollar downside risks means that the key 1.2420 and 1.2500 levels can be tested quite soon.

Today, UK PMIs will be watched after significantly stronger-than-expected retail sales this morning. Bank of England policymaker Catherine Mann speaks this afternoon.
 

CEE: Ready to rally further

Today's calendar offers only Czech consumer confidence data, the first leading indicator for March. We are seeing a strong rebound from historically record lows this year and further improvement can be expected this time around.

We will see more interesting news after the end of trading today. We have sovereign rating reviews in Romania and Poland. Fitch has held a negative outlook on Romania BBB- since April 2020 and we think there's more than a 50% chance that we could see a return to a stable outlook. Moody's holds a stable outlook on Poland A2 and we do not expect any changes this time. However, it will be interesting to follow the agency's view on recent developments in the government's relations with the European Commission, access to EU money, and the FX mortgage saga.

On the FX market, our bullish view on the Hungarian forint and the Czech koruna is materializing, benefiting all week from higher EUR/USD, reduced risk aversion, and record-low gas prices. We expect this trend to continue in the coming days and especially next week when the National Bank of Hungary and the Czech National Bank are both scheduled to hold meetings. Both central banks should confirm stable rates and a hawkish tone and push back against the dovish market pricing coming from the global story. In our view, this should extend the rally in the forint and the koruna.

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