EUR / USD
The Euro was unable to make any headway after Tuesday’s European open with the stronger than expected German factory orders data unable to provide significant support. ECB council member Knot stated that the ECB can be expected to increase interest rates for quite some time after March.
In prepared remarks to the Senate Banking Committee, Fed Chair Powell stated that the latest data had been stronger than expected, particularly for inflationary pressures. He also reiterated that there was little sign of disinflation so far in core services excluding the housing sector. Powell also stated the Fed is prepared to increase the pace of rate hikes if the totality of incoming data indicates that faster tightening is warranted. In this context, he also noted that the dot plots of interest rate forecasts at the March meeting may well be higher than in December. He also rejected the argument that the Fed has over-tightened.
He did, however, add that the bank has significant data to see ahead of the March policy meeting and that there are many unusual factors affecting inflation.
He also expects housing inflation to moderate in the next 6-12 months, but the overall tone was hawkish.
Following Powell’s hawkish overall testimony, there was a notable shift in Fed Funds futures with markets pricing in a 65% chance that the Fed will increase rates by 50 basis points to 5.25% at the March meeting. Equities declined sharply and the dollar posted strong gains with the Euro dipping to lows near 1.0550.The dollar edged higher again on Wednesday with the trade-weighted index at 3-month highs while the Euro posted 2-month lows around 1.0525. The latest ADP jobs data will be watched closely on Wednesday for further evidence on the labour market, especially as last month’s data was substantially weaker than the BLS employment report.
The Euro did creep away from lows and traded around 1.0540 following a stronger than expected German report with a 3.5% increase in industrial production.
The yen held in tight ranges ahead of the US open, but with a stronger dollar bias. The US IBD consumer confidence index rose to 46.9 for March from 45.1 previously.
US yields increased sharply following Powell’s comments with the 2-year yield hitting 5.0% for the first time since 2007. There was smaller retreat in longer-term Treasuries with the 10-year yield just below the 4.00% level and the 2/10 yield curve hit a record inversion of over 103 basis points, reinforcing recession speculation.
Geo-political developments were also in focus after Chinese foreign minister stated that the US and China are on course for conflict.
The sharp increase in 2-year yields provided strong dollar support with gains to highs above 137.00 against the yen.
There was further upward pressure on yields during the Asian session with the dollar posting 10-week highs at 137.90 before a slight correction to 137.65. Markets are not expecting a change in Bank of Japan policy this week, although there will be an element of caution ahead of the Friday announcement.
In comments on Tuesday, Bank of England Monetary Policy Committee member Mann stated that she was concerned about the persistence of core inflation and that she thinks more needs to be done with interest rates. She also strayed on to the subject of currencies and warned that the Pound could face downward pressure if investors have not yet fully priced in hawkish messages from the Federal Reserve and ECB. She added that there could be more Sterling depreciation if it’s not priced in.
The comments unsettled Sterling to some extent with a quick move below the 1.2000 level against the dollar.
Global developments had a more substantial impact in undermining the currency after the New York open. Hawkish rhetoric from Fed Chair Powell triggered direct selling as the dollar posted sharp gains and the slide in equities also undermined the UK currency as global risk appetite deteriorated.
Sterling slumped to 2023 lows around 1.1825 against the dollar with the Euro also posting gains to 2-week highs around 0.8920.
The UK currency dipped to 3-month lows at 1.1810 on Wednesday before a marginal recovery with a slight Euro correction to 0.8910.
Swiss National Bank Chair Jordan stated inflation is low in international comparisons, but above the price-stability target. He added that that monetary policy is still too loose and that the bank cannot rule out that policy will have to be tightened again with further increases in interest rates.
The franc traded in relatively narrow ranges against the Euro with a lack of gains despite the hawkish SNB rhetoric and weaker equities. It settled little changed around 0.9940 while the dollar posted strong gains to 0.9425. There was little net change on Wednesday with the dollar around 0.9430.