FOMC minutes provide little relief for dollar bears
This Daily Digest will cover:
- 📝 FOMC minutes provide little relief for dollar bears
- 📊 Stocks look wobbly
- 🇯🇵 Awkward time for JPY
- 🪙 Crypto – lower before higher?
Federal Reserve Chair Jerome Powell has struck a relaxed tone in recent press appearances, sounding quite jovial at times when stating that the ‘disinflation process has started’.
The most recent FOMC minutes paint a different, more hawkish, tone as terminal rate consensus edges higher and higher. The reality is that there was little for dollar bears last night and the fanfare around a mythical pivot continues to dwindle. The market is now pricing in three additional hikes of 25 bps in the upcoming meetings, pushing terminal rate expectations into the mid-5’s.
The news from across the pond has drowned out strong European and British PMIs earlier this week, although the healthier than expected data has dampened the impact of the shift up in the US yield curve, with rate differentials playing their part in keeping FX somewhat more muted than you would expect. The backdrop looks to be generally constructive for dollar strength in the near term though, as yields push higher I would expect to see DXY towards 105-106. US equities looked wobbly yesterday with the S&P closing below 4,000 for the first time since 20 January and briefly flirting with the 200-day moving average. Higher yields, increased geopolitical risk and dollar strength will all weigh on US equities, but I expect the growth-stock heavy NASDAQ to be the big loser here as discount rates ramp up. For dollar bears, both activity and price data will have to soften over the coming weeks to make an impact on an otherwise hawkish Fed. The next set of meaningful US data is tomorrow’s core PCE data for January – but even that is likely to see the core month-on-month reading rising to 0.4% from 0.3%. Otherwise focus will swing to Bank of Japan Governor nominee Kazuo Ueda, who will testify before Japan’s Lower House on Friday in Japan in what has been awkward time for JPY trading – JPY has generally wilted on advancing long US yields, but at the same time an anticipation of a coming policy shift from the Bank of Japan has served to support the currency.
Crypto’s recent divergent strength has been tested of late. A (savage) rejection of the key 25,200 level by BTC was coupled with a souring of risk sentiment in what I thought may be a trigger for the market to trade back towards 20,000. However, like a trooper, it is back above 24,000 this morning. Idiosyncratic news of continued institutional adoption seems to be propping the market up. A break above 25,200 would be a massive moment for bulls and would make a run away towards 29,000 a possibility. The caveat here is that it most likely needs to come before financial conditions and global liquidity tighten up too much further. I fear it may still be a case of ‘lower before higher’ for crypto.
As always, good luck out there.
