Dovish Fed But Yields Rise, Helping The Greenback Recover From Yesterday's Slide

The euro recovered on the back of the dovish Fed, but the demand faded near last week's high (~$1.1990) and in front of the $1.20-level and the 20-day moving average ($1.2015).  This puts the pressure back on the downside. The risk is for a return to the $1.1885 area.  Note that several ECB officials are speaking today, and new TLTRO funds will be available.  Sterling also tested last week's high just above $1.40, but it too met sellers.  The market is cautious ahead of the BOE meeting outcome.  Sterling may have another run at the highs, but the odds favor a continued range-trade affair between $1.38 and $1.40.  Lastly, the outcome of Turkey's meeting is awaited, and most are looking for a 100 bp hike in the one-week repo rate that will take it to 18%.  Ahead of it, the lira is trading near its best level in a couple of weeks (FXE, FXB).  


The Fed revised up its growth forecast, and the number of officials that see a hike in 2022 and 2023 increased, but the market understood the dovish message.  It was dovish in two important respects.  First, most officials still do not see a hike until after 2023.  Second, Powell underscored that substantial progress toward maximum employment and price stability is not about forecasts but actual data. The Fed Chair was explicit that a transitory increase in prices will not meet the standard for a policy shift.  As we have discussed, the base effect from last year's pandemic-gust of deflation dropping out of the year-over-year comparisons will lift consumer inflation readings starting this month. The Fed will see through this, and monetary policy will remain accommodative.  Separately, Powell indicated a decision on the special leverage ratio exemption for Treasury and excess reserves from the calculation will be announced in the coming days.  

Today's US economic diary features weekly initial jobless claims for the week ending March 13.  The previous week, they fell by 42k to 712k.  They have not been below 700k since the middle of last March.  The March Philadelphia Fed manufacturing survey is expected to build on February's recovery.  The February Leading Economic Indicators are not a market-mover.  Fed talk resumes next week, with no fewer than seven official presentations, including Powell and Yellen before the Senate Banking Committee on March 24.  Canada and Mexico have light calendars today.  Tomorrow Canada reports January retail sales, which seems dated, especially after the recent Bank of Canada meeting.  Mexico's central bank meets next week.  Lastly, we note that Brazil's central bank hiked the Selic rate by 75 bp rather than the 50 bp the market expected.  The Copom meets next on May 5, and the early call is for another 75 bp hike. 

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Read more by Marc on his site Marc to Market.

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