A stronger dollar, again
Those U.S dollar gains buoyed by that strong March payroll report last Friday continued apace through yesterday. A combination of positive Fed-speak and a lack of meaningful ‘new’ news or significant economic data for markets to digest, were probably the main drivers behind the move.
Talk is (not) cheap
Following on from those ‘data-dependent’ speakers over the weekend, the Fed’s Daly said yesterday that the odds of a 50bps rate hike at the May FOMC meeting had grown. The Fed are good at communicating future policy decisions to the markets, so as to avoid any repeat episodes such as the famous ‘taper tantrum’ so you can assume that, barring any sudden economic shocks, May is likely to yield a 50bps hike. If this is clearly not going to be the case, then we can expect some clear communication from the Fed to tell us so.
Brainard up next
Daly went on to say that she was estimating the Fed’s ‘neutral’ policy rate to sit somewhere between 2.3% and 2.5%, and was/is advocating for getting to that level ‘efficiently’ this year. The neutral policy rate is probably best described as the rate at which the Fed are neither in an expansionary nor contractionary mode in terms of rate moves. In many ways, it is far easier to say, than to actually observe. Moving on, and Lael Brainard will be speaking today, and as well as being the Fed vice chair and highly influential within the Fed, is normally somewhat more dovish on future Fed rate expectations. The key FOMC minutes from the March meeting will follow tomorrow, and they will give us all a broader insight into current FOMC thinking, should we/anyone else still need it.
So, as we said at the top, the dollar continued to benefit through yesterday, and those gains were steady, if unspectacular. Of note, EUR/USD moved back under 1.1000, and now sits in the middle of that 1.0800 – 1.1200 range. Key Euro-area data for this week starts tomorrow. USD/JPY has bounced back to 122.75 having found support around the 122.00 region toward the end of last week. The broader dollar index climbed back up toward 99.00, but remains well below the key 100 psychological region.
Bailey and the pound
BoE governor, Andrew Bailey’s latest speech yesterday did little to move the pound, or inspire markets. Therefore, GBP/USD maintained an extremely rigid 40 pip range either side of 1.3100 for the most part. GBP/EUR drifted back up beyond 1.1950.
No change from the RBA
As expected, the RBA opted against hiking Australian interest rates this month, maintaining rates at 0.1% in the process. However, and crucially for markets, the RBA appeared less dovish in their accompanying statement. This was especially the case with their outlook on inflation, which has resulted in a strong rally for AUD/USD overnight, to over 0.7630. That represents a ten-month high. Previously, the RBA had a ‘patience’ reference inserted within their statement, but given that surge in global inflation, this reference has now been removed. Small changes mean much. Markets are still expecting the RBA’s initial hike to come in June, with a slew of further hikes now more comfortably priced-in before year end, hence today’s rally in the Aussie.
Today’s U.S ISM Services PMI print will also be one to watch. Having reached 56.1 last time round, markets expect an increase to around 58.0 for the March report. Markets may pounce on any release that is wide of the mark given what we said above, and the current sensitivity to keynote data releases.