FX Daily: Doubts over Fed’s tightening bias and BOE’s pause outlook
DXY removed “higher for longer” bets.
Group Research - Econs, Philip Wee23 Mar 2023
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DXY depreciated 0.7% to 102.5, near the levels around the previous FOMC meeting in early February. The markets removed the Fed’s “higher for longer” rates premium after the FOMC maintained the 2023 target for Fed Funds Rate at the 5.1% pencilled last December. DXY initially fell as low as 102 during the session on higher US stocks and lower US bond yields, hoping that the Fed would soon pause its hiking cycle after delivering the second 25 bps rise to 4.75-5%. The US Treasury 2Y yield eased 23 bps to 3.94%.

However, the 0.9% bounce in the S&P 500 was short-lived, with the index ending 1.7% lower by the end of the session. The market dumped bank shares again after US Treasury Secretary Janet Yellen told a Senate hearing that she had “not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.” Breaking ranks with low bond yields, DXY reprised its haven role and recovered to 102.5. Upon closer inspection, the Fed’s dot plot revealed that the FOMC still holds a “higher for longer” rate bias. However, this matters after the banking problems are resolved.

GBP is eyeing the ceiling of its four-month range between 1.18 and 1.2450. Markets are unsure if the expected 25 bps rise in the bank rate to 4.25% will be the Bank of England’s final hike for 2023. UK CPI inflation surprised in February after three months of slower readings. Headline inflation bounced to 10.4% YoY (vs 9.9% consensus) from 10.1% in January and core inflation to 6.2% (vs 5.7% consensus) from 5.8%. Hence, doubts have increased over Office for Budget Responsibility’s latest prediction for inflation to fall to 2.9% by the end of 2023 and whether Prime Minister Rishi Sunak can fulfil his pledge to halve inflation this year. During his Budget announcement on 15 March, Chancellor of the Exchequer Jeremy Hunt did not expect the UK economy to enter a technical recession in 2023. Given this backdrop, the BOE may need to keep the door open for more hikes.

Quote of the day
“Rate cuts are not in our base case.”
     Fed Chair Jerome Powell

23 March in history
Pakistan became the first Islamic republic in the world in 1956.

Philip Wee

Senior FX Strategist - G3 & Asia
[email protected]

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