Crypto left behind – for now

This Daily Digest will cover:

• Fed dot plot looking wobbly
• EUR to stay supported
• Crypto left behind – for now

Well, markets are still trading mixed having navigated last week’s Fed and ECB meetings. The Fed’s big ticket event pedalled a tone of ‘hawkish pause’, as consensus had largely determined, but pushback from a hawkish ECB and the prospect of other central banks having the ammunition to keep raising rates has left the dollar with a soft underbelly.

Dollar weakness is admittedly a contrarian shout: gains for the core majors have slowed since Friday, commodity FX is softer (despite broadly stronger equity markets), US yield curve is still heavily inverted and USD/JPY has drifted towards 142 after the BoJ left policy unchanged last week. DXY looks stable for now, but could be poised to soften as markets consider whether the Fed can fully deliver on the implied hikes in last week’s dot plot -July swaps imply 17-18 bps of tightening, with September’s contract only reflecting a total of 21 bps of hiking. Reaching the peak of the Fed policy cycle is likely to be negative for the USD and positive for risk assets, as cash pivots from the high yielding USD towards riskier assets in anticipation of some relaxation in monetary policy. This is all largely baked in, but awaits a catalyst – with the Fed blackout lifted, the gloves are off this week, and we may see some dovish dissent from the voting members. I see DXY trading the week with a downside bias beyond 102.00.

Across the pond, a failure in China to announce fresh stimulus measures dented
EUR/USD momentum through the 1.0950 zone, but investors retain more conviction about the hawkish policy outlook in Europe relative to the US, which should buoy EUR sentiment and keep it supported through 1.0910. A near-term move towards 1.1000 looks likely as investors position for a second half dollar decline. Expectations around GBP remain elevated as snapshots of consumer inflation expectations show some progress, yields climb and indicators on the chart look good, but a ticking mortgage time bomb and a clown school at Downing Street are enough to convince me to give it a wide berth and express any market view elsewhere.

Any crypto momentum in line with equity markets has largely been cratered by operation Chokepoint 2.0 – the US executive quietly leaning on its institutions to strangle access for the industry. Peak Fed rates, a relaxation of monetary policy and the subsequent injection of liquidity should hopefully come into play for crypto soon, but while there is so much regulatory risk abound I struggle to see new ground being broken in any tokens. A continuation of consolidation marked by a growing share of BTC market dominance is the most likely situation in the medium term.

As always, good luck.

James Laidlaw
OTC Trader