FX Market Update
Markets are settling into ranges as investors curb risk-taking ahead of the FOMC. Stocks are trading narrowly after yesterday’s US market declines. Bonds are a little softer in Europe while Treasurys are steady. Caution has given the USD a broad— short-covering—lift versus the majors. The main market mover is Turkey where the TRY and local bonds plunged on renewed domestic political risk.
There does appear to be a lot of uncertainty about what the Fed will deliver today. No change in policy is expected but rather more interest will be in how Fed Chair Powell articulates the risks around the outlook as the economy appears at risk of weakening sharply in Q1 amid uncertainty over US trade policy while core PCE remains sticky and inflation expectations have jumped as consumers fret about the impact of tariffs.
Swaps reflect a little more than 50bps of anticipated easing this year so what the dot plot implies in this respect will be key to how the USD reacts. It’s hard seeing the Fed sound more hawkish at this point but that might be what the USD needs to stage any sort of major turnaround.
The Fed is the main event today but the late afternoon release of the January Treasury International Capital (TIC) flows data may warrant some attention. Net inflows have been positive, if slowing after a sharp increase in net inflows last September, but December’s data reflected the largest ever one-month net outflow but official (i.e., central banks etc.) accounts from US assets. Earlier, the BoJ left policy unchanged, as expected. More tightening seems likely (possibly at the next policy decision), given rising wages and upside risks to the inflation outlook.
USDCAD (1.4330)
The CAD rebound petered out below 1.43 yesterday. A slightly firmer USD ahead of the Fed has added to the lift in funds today but investors will be reluctant to bid up the CAD too far ahead of more clarity on tariff risks facing Canada. The USD still looks overvalued relative to what tariff action has been deployed—and what might yet emerge. But there is unlikely to be a significant recovery in the CAD ahead of April 2’s tariff update and even then, wide short-term, rate spreads really do need to narrow significantly to drive the CAD sustainably higher.
USDCAD short-term technicals:
Bullish—A firm rebound from yesterday’s intraday low around 1.4270 set a bullish, short-term reversal signal on the 6-hour chart (outside range higher). The rebound coincided with spot testing trend support for the USD off the September low. USDCAD gains may extend to the 1.4350/80 zone in the near term. A break above the upper 1.43s would pave the way for a return to the low/mid-1.44s. Support is 1.4250/70.
EURUSD (1.0901)
Spot has drifted a little lower through the overnight session after failing to progress through the mid-1.09s. Intraday volatility may have been accentuated by the sharp swings in Turkish markets earlier. Eurozone data showed a slowdown in Q4 Labour Costs (to 3.7% in the year, from 4.5%). Eurozone Feb CPI was revised a tenth lower (0.3% m/m, 2.3% y/y). Little substantive progress emerged from US/Russia talks on Ukraine yesterday—underscoring perhaps how hard it may be to get a lasting agreement.
EURUSD short-term technicals:
Neutral/bullish—The EUR has drifted a little lower after again failing to progress above the mid-1.09 point. There is some technical jeopardy for the EUR here, but only if spot losses extend below key short-term support at 1.0830 (double top trigger). Otherwise, the bull trend is consolidating and still prone to pushing higher. Minor dips are still likely to find willing buyers.
GBPUSD (1.2963)
Sterling is softer on the session, in line with its G10 peers. There were no UK data reports today, leaving the pound to essentially track the general trend in the USD once again. UK pay and employment data tomorrow are, however, likely to bolster the case for only cautious easing steps from the BoE in the coming months, proving something of a cushion for the pound.
GBPUSD short-term technicals:
Neutral/bearish—GBP gains may be slowing. The broader bull trend looks solid but short-term price action suggests Cable has reached a minor peak at least just above 1.30. Loss of support at 1.2955 will trigger a little more weakness intraday and tilt the daily pattern of price action a little more negative potentially.
