FX Daily: FOMC supports more USD upside; GBP and CHF to disappoint on BOE and SNB today
DXY appreciated 0.2% to 105.3 on the Fed’s “hawkish pause.” The Fed kept the Fed Funds Rate unchanged at 5.25-5.50% and affirmed its “higher for longer rates” bias at yesterday’s FOMC meeting. The Fed maintained the projection for one more hike this year because inflation was still well above the 2% target. In the Summary of Economic Projections, the Fed lifted its 2023 forecasts for PCE inflation to 3.3% from 3.2% and lowered Core PCE inflation to 3.7% from 3.9%. Stronger US economic activities led the Fed to project two instead of four rate cuts next year. The Fed lifted the GDP growth forecasts to 2.1% from 1% for 2023 and 1.5% from 1.1% for 2024. It also lowered the projections for the unemployment rate to 3.8% from 4.1% for 2023 and 4.1% from 4.5% for 2024-2025. US Treasury 2Y yield firmed 8.6 bps to a fresh 17-year high of 5.18%. The 10Y yield rose 4.8 bps to 4.41%, its highest close since 2007. Despite the Fed pause, this was the first FOMC the DXY held above its end-2022 close. We see DXY pushing above the year’s high of 105.88 in March. On Monday, we revised our forecasts for DXY to end 2023 at a new year’s high of 107.
GBP to depreciate on a “dovish hike” today. The Bank of England will likely increase its bank rate by 25 bps to 5.5% today. BOE member Catherine Mann does not support a pause, preferring to err on the side of over-tightening. However, interest rate futures reckoned today could be the final hike. BOE Governor Andrew Bailey testified to Parliament earlier this month that inflation would continue to fall and that the BOE was “much nearer to the top of the cycle.” CPI inflation did slow to 6.7% YoY in August, bucking the consensus for a rebound to 7% from 6.8% the previous month. Core inflation decelerated to 6.2% from 6.9%. BOE Chief Economist Huw Pill prefers keeping rates “high for longer” than increasing them, citing tightening credit and rising corporate indebtedness. UK GDP contracted by 0.5% MoM in August, its worst in seven months from the services, construction, and manufacturing declines. BOE Deputy Governor (Financial Stability) Sir Jon Cunliffe has been leaning towards a pause after the unemployment rate hit 4.3% in August, its highest since September 2021. GBP/USD depreciated 2.7% this month to 1.2336, below the 1.2455 average for this year. GBP is currently near the 61.8% Fibonacci retracement level (1.2315) of its March-July rally from 1.18 to 1.3140. Taking out this level would allow GBP to fall towards the 75% Fibo level around 1.2140.
USD/CHF to trade above 0.90 on a “dovish hike” today. We see the Swiss National Bank delivering a final 25 bps hike to its 2% neutral rate or a level that neither slows nor accelerates output. The favourable circumstances of the June hike have reversed. First, the Swiss economy disappointed with growth flattening to 0% QoQ sa in 2Q23 after a surprise 0.3% growth in 1Q23. Second, CPI and core inflation returned inside the 0-2% target in July and August. Hence, the SNB is unlikely to brush aside the heightening economic headwinds from Europe and China on the small and open Swiss economy. USD/CHF traded decisively above its 100-day moving (0.8883) this month. USD/CHF rose 1.8% to 0.8994 this month, near the 50% Fibonacci retracement level (0.8996) of its March-July sell-off from 0.9440 to 0.8550. Pushing above this level would open the door higher to 0.91 (61.8% Fibo) and 0.9220 (75% Fibo).
Quote of the day
“The worst thing we can do is to fail to restore price stability because the record is clear on that.”
Fed Chair Jerome Powell on 20 September 2023
21 September in history
Bahrain, Bhutan, and Qatar joined the United Nations in 1971, Seychelles in 1976, and Brunei in 1984.
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