FX Markets in Flux: Navigating Fed Commentary and Global Economic Signals

FX Daily: Waiting for the Fed pushback

FX markets are consolidating after a few risk-on days. We have seen some strange price action on the back of the RBA's 25bp hike and some mixed Chinese data. For today, it looks like a relatively quiet session, although the focus will be on how aggressively the line-up of Fed speakers wants to push back against the recent weakening of US financial conditions.

 

USD: Fed speakers will be in focus today

FX markets have handed back a little more of their risk-on gains overnight, leaving the dollar marginally stronger. However, US ten-year Treasury yields are still down at 4.65% and last night's release of the Fed's Senior Loan Officers Survey serves as a reminder that credit conditions are tightening and lending growth is weakening – both of which are likely to weigh on the US economy over coming quarters.

In quiet overnight developments, what stands out is the strange reaction in AUD/USD to the Reserve Bank of Australia's 25bp hike. The poor performance of AUD/USD may owe to positioning, or perhaps some read that if the RBA needs to restart its tightening cycle after a four-month pause, maybe the Fed does too. Yet, US rates have not moved much, and the Australian dollar also failed to gain ground on slightly better-than-expected Chinese import data. Perhaps the read here is that the market needs a lot more evidence before pushing on with the Fed pause/peak and weaker dollar scenario.

Today, the US highlight will be Federal Reserve speakers, which run from 1:30 pm CET for most of the day. At issue will be whether the Fed chooses to push back against the loosening of US financial conditions. Recall that the tightening of financial conditions in mid-October prompted remarks such as the 'term premium is doing the tightening'. Now that these financial conditions have fully reversed that October spike, the Fed will presumably want to re-emphasise the risk of further rate hikes. 

Risks look skewed to a mildly stronger dollar today. DXY closing above 105.50 undoes some of last week's bearish work. But from where we stand, it looks like DXY might bounce around in a broad 104.50-106.50 range into year-end.