EUR / USD
The Euro remained under pressure in early Europe on Wednesday with further concerns over the situation in Ukraine following the announcement by Russian President Putin that there would be partial military mobilisation in Russia. Putin’s warnings over the West over nuclear weapons also unsettled risk sentiment.
The Euro dipped below the 0.9900 level, and, although there was no challenge on the 0.9850/60 area it remained under pressure into the Fed decision.
The Federal Reserve increased interest rates by 75 basis points to 3.25% which was in line with consensus forecasts and with a unanimous vote. The statement noted that inflation remained elevated and that the central bank was highly attentive to inflation risks with interest rates set to increase further.
The new set of economic projections downgraded the growth outlook with inflation forecasts slightly higher. The end-2022 projection for the Fed Funds rate was increased to 4.4% from 3.4% in June with the end-2023, forecast raised to 4.6% from 3.8%, but rates are expected to decline over the following two years.
Chair Powell reiterated the need to combat inflation and that the Fed will be moving policy to a level that is sufficiently restrictive. He added that inflation risks are still skewed to the upside and the bank will want compelling evidence that inflation is declining with the probability that a restrictive policy will be needed for some time.
In this context, Powell warned that it was likely that a period of substantially slower growth was quite likely and it would be painful to get inflation down while labour-market conditions may soften. He did, however, add that it will eventually be prudent to slow the pace of rate increases.
The dollar strengthened sharply on the revised interest rate projections and posted fresh 20-year highs with the Euro skidding to 19-year lows around 0.9815. The US currency retreated from its best levels on Powell’s comments before strengthening again as a slide on Wall Street triggered defensive dollar demand.
The Euro dipped to fresh 19-year lows just above 0.9800 before trading around 0.9825 in early Europe on Thursday with dollar sentiment remaining strong.
US Treasuries edged higher into Wednesday’s New York open with yields edging lower, although there was choppy trading. The dollar held a firm tone, with highs close to 144.20 before drifting to just below 144.00. US August existing home sales declined marginally to 4.80mn from 4.82mn and above expectations of 4.70mn.
Treasuries dipped in an immediate response to the Fed policy decision with the 10-year yield above 3.60% before a move back to near 3.50%.
The dollar peaked at 144.70 before a retreat back below 144.00 amid lower yields while there was strong dollar buying on dips.
The Bank of Japan left monetary policy unchanged following the latest policy meeting, in line with expectations as interest rates were held at -0.1% and the aim to cap 10-year yields at 0.1%. Overall yield spreads continued to undermine the yen and the dollar posted fresh 24-year highs above 145.00. There was no sign of intervention by the central bank to support the yen, but there was evidence of strong selling by major funds. The dollar still secured strong buying on dips amid wide yield spreads.
Sterling remained under pressure in early Europe on Wednesday with the wider than expected budget deficit and record debt interest payments reinforcing unease over the outlook. A further dip in risk appetite on Russian/Ukraine developments also sapped confidence in European currencies. Sterling dipped to fresh 37-year lows just above the 1.1300 level before attempting to stabilise. The CBI industrial orders index recovered to -2 for September from -7 previously and stronger than consensus forecasts of -13. Manufacturers, however, expect a significant decline in output over the next quarter with inventories increasing significantly.
Sterling struggled to make any headway and dipped sharply to fresh 37-year lows below 1.1250 in an immediate response to the Federal Reserve policy decision. Rally attempts faded quickly with a slide in equities further eroding currency support and the UK currency again traded below 1.1250 on Thursday.
The Euro retreated slightly to 0.8740 ahead of the Bank of England policy decision with expectations that rates will be increased at least 50 basis points.
The Swiss franc continued to post gains on Wednesday with the Euro sliding to fresh 7-year lows just below 0.9520 while the dollar hit resistance close to 0.9700 and consolidated around 0.9650. the Swiss currency was boosted by renewed concerns surrounding the Ukraine situation.
The franc was also boosted by expectations of a further National Bank rate hike and a hawkish policy stance at Thursday’s quarterly meeting. Consensus forecasts are for an increase of 75 basis points to 0.50% with currency rhetoric watched closely. Weaker equities also underpinned the franc and the dollar traded just above 0.9650.