Forex news: USD weakens on hawkish Fed as growth risks mount
09:55, 17 March 2022
The US dollar took a hit after the Federal Open Market Committee's (FOMC) meeting, which delivered a 25-basis-point hike while forecasting six further hikes by the end of the year and the beginning of a more aggressive quantitative tightening in the coming months.
The Federal Reserve (Fed) reduced its near-term growth predictions downward substantially, while raising inflation projections, in response to the Russian invasion and associated events, as well as sustained wage pressure in the labour market.
Fed Chair Jerome Powell said that “the time for rate increases and balance sheet reductions has come” and that the economy and labour market can withstand tighter financial conditions.
The Treasury market saw spectacular fluctuations, with the two-year yield soaring above 2% before retreating to 1.93%, and the five-year yield surpassing the ten-year maturity. The US yield curve has reversed in the five-to-ten year range for the first time since 2007.
Today's macro agenda is jam-packed with market-moving events, including the Bank of England's (BoE) decision, speeches by Christine Lagarde, Philip Lane and Isabel Schnabel of the ECB, the Philadelphia Fed Manufacturing Index for March and Japan’s inflation figures for February.
The BoE increased its Bank Rate by 25 basis points to 0.75%, for the third time in a row, as expected, and signalled "some further modest tightening" in the coming months.
On the geopolitical front, there were setbacks on compromise efforts in the negotiations between Ukraine and Russia, while President Volodimir Zelenskyy gave a speech yesterday to the US Congress and this morning to the German Bundestag.
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Chart of the day: US yield curve (5-10 years) inverted for the first since February 2007
Forex markets today – 17 March 2022
- In London’s morning trading, the US Dollar Index (DXY) hovered around 98.30, flat on the day. The euro (EUR) edged to $1.105, after rising 0.7% yesterday. The British pound (GBP) lost 0.2% after the BoE's decision, as the statement indicated "a weaker outlook for growth and employment".
- Safe-haven currencies, such as the Japanese yen (JPY) the Swiss franc (CHF), are mostly stable against the dollar this morning.
- Oil-linked currencies are little moved despite rising crude prices. The Canadian dollar (CAD) and the Norwegian krone (NOK) gained a shy 0.1% and 0.2% respectively..
- The high-beta Australian dollar (AUD) is the best performer among G-10 currencies, climbing by 0.7%, as lower than expected unemployment rate in Australia fuelled expectations for tighter monetary policy. The New Zealand dollar (NZD) was up by 0.2%.
- Central Eastern European (CEE) currencies reversed past gains following hopes of de-escalation between Russia and Ukraine. The Polish zloty (PLN) fell 0.7% versus the EUR. The Czech koruna (CZK) and the Hungarian forint (HUF) lost 0.2% and 0.4%, respectively.
- The Russian rouble (RUB) remains in rollercoaster. The USD/RUB pair lost 7.7% yesterday and it's up 16% this morning as default risks loom. The Russian Ministry of Finance announced that the payment order for the coupon yield on the Russian Federation's external bonded loans expiring in 2023 and 2043, totaling $117.2 million and due on March 15, 2022, was issued to the foreign correspondent bank on March 14, 2022, and was remitted.
- Emerging market (EM) currencies were mixed. The Mexican peso (MXN) rose 0.3% after climbing 0.9% yesterday. The South African rand (ZAR) is flat after rallying 1.3% yesterday, while the Turkish lira (TRY) fell 1.2% after Central Bank of Turkey kept rate on hold. In Asia, the Korean won (KRW) gained 1%, while the Chinese yuan (CNH) held steady.
Major currencies: Top risers and fallers today – 17 March 2022
Forex market heatmap – 17 March 2022
FOMC March meeting: key takeaways
- As expected, the FOMC boosted the Federal Funds rate by 25 basis points, delivering the first increase in interest rates since January 2019. The board had one dissenter, St. Louis Fed President James Bullard, who voted for 50 basis points.
- The new dot chart predicted six more rate increases this year (25 basis points at each meeting), with the Fed Funds rate at 1.9 percent by the end of the year, and four hikes in 2023, with the Fed Funds rate at 2.8 percent.
- GDP growth predictions for 2022 have been trimmed to 2.8 percent, a significant decrease from the 4 percent predicted at the December conference.
- Headline inflation (PCE) is now forecast to average 4.3 percent in 2022 (up from 2.6 percent in December), while core inflation (Core PCE) is expected to average 4.1 percent (up from 2.7 percent in December).
- During the press conference Fed Chair Jerome Powell said that “the committee is strongly committed to achieve price stability”. Powell also said that the balance sheet contraction (quantitative tightening) will begin at the next meeting (May), will be faster than the last time, and will occur earlier in the cycle.
- Powell refused to accept that the Fed is behind the curve, instead emphasising that the board has measures to prevent inflation from becoming entrenched. He said that wage growth is substantially more than what is sustainable with 2% inflation due to a mismatch between labour demand and supply. Tighter financial conditions are projected to rebalance supply and demand, lowering price pressures.
- When asked about the likelihood of the Federal Reserve tightening policy causing a recession, Powell said that the economy is quite robust and positioned to handle tighter monetary policy.
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