USD: higher rates for longer
As we explained in yesterday’s Fed reaction article, the dollar initially sold off on the FOMC statement, but then rallied in what was broadly a trading conference. warmongering press. After the dust settled, the US money market curve had steepened – for example, six-month USD 1 million OIS rates were 6 basis points higher, but 12-month rates were 12 higher. basis points. There were many ways to read the press conference, but one interpretation is that Chairman Powell was trying to divert the narrative from how fast the Fed would rise to where the terminal rate should go and how long it should stay the. The press conference also ended with President Powell feeling frustrated that inflation hadn’t fallen faster – and he certainly didn’t encourage those in the market who were looking for a drop. rents (a key element of underlying inflation).

With the focus now on the terminal rate, Chairman Powell guided expectations that it will be above the 4.50-4.75% zone the Fed had estimated in September. This could set us up for another potential USD bullish event with the release of the next set of projections on December 14 – assuming neither employment nor core inflation declines soon.

Expect Fed policy to prove a bullish USD undercurrent and an even more inverted US yield curve to weigh particularly on high beta activity and commodity currencies, such as the Australian and New Zealand dollars, the Norwegian krone and the Swedish krona. Where there might be some joy for those a little more bearish on the dollar is among the high yielding Latam FX – particularly the Mexican peso. Some have argued that slowing the pace of Fed hikes could reduce volatility in interest rate markets. Indeed, the MOVE index – a basket of implied US Treasury volatility across all maturity buckets – fell slightly yesterday. Currency volatility is generally driven by interest rate markets. Lower FX volatility will boost risk-adjusted returns, where we think the implied yields of 11.1% MXN available over the three months look attractive and could drive USD/MXN to 19.45/50 for some time. brief periods of calm.

For today’s US session, the focus will, as usual, be on the weekly UI claims data. We also have the ISM Services and the September Trade Balance. The US monthly trade deficit has narrowed from $107 billion to $67 billion this year, no doubt helped by rising US energy exports. Another positive dollar.

We favor a flat to higher DXY today (perhaps at 112.50) as the market consolidates ahead of tomorrow’s monthly US employment report.

Chris Turner

EUR: hedging costs in dollars are again 3%
The jump in US short rates widened the two-year spread between EUR and USD swap rates back to 210 basis points, not far from the widest levels of the year. Similarly, shorter-term yields now indicate that it will cost euro-based companies around 3% a year to hedge the dollar using rolling three-month futures, which is expensive. EUR/USD is gradually slipping back towards 0.98 and we think momentum could easily build for a push towards 0.9650 tomorrow if US jobs and payroll data does not slow as much as expected. . In Europe today, there are plenty of speakers from the European Central Bank, where doves are trying to get the message across that the coming recession will do part of the job of bringing inflation down from its highs. EUR/USD could trade in a range of 0.9760-0.9850 today.

Chris Turner

The Bank of England (BoE) won’t be the only European central bank to announce policy today, as Norway’s Norges Bank (NB) is also expected to make another hike. We note that the consensus is split between a 25 bps move and a 50 bps move today: we expect a half a point rise, as the September CPI upside surprise (6.9% YoY) may have overshadowed concerns about slowing economic activity. We believe this may offer additional support to the krone, which is already benefiting from the strong performance of oil and the support of Norges Bank’s reduced daily currency purchases (from NOK 4.3 billion to NOK 3.7 billion ) for November. EUR/NOK could break below 10.20 in the near term, but we suspect that worsening risk sentiment conditions late in the year could limit further NOK appreciation.

Francesco Pesol

GBP: Possible BoE 50 bp surprise today
My colleague James Smith makes the “brave” plea that the Bank of England will only hike 50 basis points today. His argument is that the consensus 75bp hike would end up seeing the UK CPI undervalue the BoE’s 2% target in 2025. In other words, the BoE doesn’t need to pick up the pace. tightening right now. As we discuss in this BoE preview, the FX options market pegs a range of 150 pips GBP/USD to today’s event risk. This could see GBP/USD back into the 1.1250 area if we are right with our BoE call. EUR/GBP could also come back to 0.87.

The Pound also looks challenged by both: i) the international investment environment where US stocks sold 2.5% yesterday on the prospect of higher and longer Fed rates and ii) what is shaping up to be a pretty tight budget event in the UK on November 17. as the new government strives to close its borrowing gap.

Chris Turner

ECO: no change in Czech National Bank’s approach
The highlight of this week’s calendar is today’s meeting of the Czech National Bank (CNB). We expect interest rates to remain unchanged, in line with market expectations. So the key will be the central bank’s new forecast, which we believe will show lower inflation but also higher wage growth. Interest rate forecasts or any indication of the timing of the first rate cut next year and the long-term level will also be critical for the market. However, the focus will be on intervention in the foreign exchange market, with which the CNB has been defending the crown since mid-May. However, in our view, the central bank’s current approach will only continue and we do not expect any change.

In the FX market, we see the krone underperforming the Polish zloty in recent days, which can be attributed to building up short positions ahead of the CNB meeting. We can expect this trend to continue until the central bank’s decision at 24.60-70 EUR/CZK as a bet on the end of the intervention regime. But after the press conference, we can expect the liquidation of these positions and the return of the krone to stronger levels. However, we believe that this effect will be less than at the September meeting since it is clearer that the CNB will not change its intervention regime.

Elsewhere in the region, given the empty calendar, it will only be fallout from yesterday’s Fed meeting and, as expected, the picture is clearly negative for CEE currencies. EUR/USD heads lower as rising base rates push interest rate spreads lower across the region. Thus, we expect the Polish Zloty and Hungarian Forint to open with losses today.

Frantisek Taborski
Source: ING

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