Dovish Fed policy update provides some temporary relief for JPY

USD: Fed sticks to plans for lower rates despite recent stronger US inflation

The US dollar has continued to weaken during the Asian trading session after the sharp sell-off in response to the latest FOMC meeting. It has brought an abrupt end to the run of four consecutive daily gains for the dollar index which has fallen sharply from an intra-day high yesterday of 104.15 to an intra-day low overnight of 103.17. The main trigger was the Fed’s surprisingly dovish policy update that has triggered a dovish repricing of the US rate curve. The 2-year US Treasury bond yield has adjusted lower by around 15bps from the recent high on 18^th March. It reflects increased confidence amongst market participants that the Fed will begin to cut rates at the June FOMC meeting and deliver at least 75bps of cuts by the end of this year. Market expectations for lower US rates have been encouraged by updated projections from FOMC participants overnight that continued to show that the median dot remained in favour of delivering three rate cuts by the end of this year, although the median dot was revised modestly higher for the following year in favour of three rather than four cuts in 2025. It has brought some near-term relief for market participants who had been braced for the possibility that the median dot for this year could have been raised as well in favour of two rather than three rate cuts.

In the accompanying press conference, Fed Chair Powell stated that the inflation story is “essentially the same: inflation is coming down gradually towards 2 per cent on a sometimes bumpy path”. The comment highlights that the Fed is not yet overly concerned by the upside inflation surprises at the start of this year in January and February. The modest upward revision to the Fed’s inflation forecasts for this year also indicated that they expect the recent pick-up in inflation to prove temporary. The PCE deflator forecast for this year was left unchanged at 2.4%, and the core PCE deflator forecast for this year was revised only modestly higher by 0.2ppt to 2.6% compared to the previous forecasts from December.

The biggest revisions were made to the growth forecasts. The Fed revised higher the economic growth forecast for this year by 0.7ppt to 2.1%. As a result the forecast profile now shows that the Fed expect the US economy to continue expanding above their estimate of the longer run growth rate through to 2026. The combination of stronger growth while still expecting inflation to slow back to target highlights that the Fed is becoming more optimistic over the supply side of the economy to generate a softer/no landing scenario whereby they will still be able to lower rates to less restrictive levels of closer to 3.00% by the end of 2026. Overall, the dovish policy update from the Fed will help to dampen upside risks for the US dollar in the near-term, and should continue to support the outperformance of FX carry trades at the start of this year.

USD/JPY VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

GBP/JPY: Japan signals concern over JPY weakness ahead of MPC meeting

The dovish policy surprise from the Fed has helped to at least temporarily disrupt the heavy sell-off for the yen which has followed this week’s BoJ policy update. After threatening to test the highs from recent years at just below the 152.00-level yesterday, USD/JPY briefly dropped back to a low overnight at 150.27 although it has since climbed back up towards the 151.00-level. The sharp yen sell-off in recent days has drawn more concern from Japanese policymakers overnight. Finance Minister Suzuki warned that it is “important that FX moves stably” and that he is watching “forex moves with a sense of urgency”. Similarly, Chief Cabinet Secretary Hayashi emphasized that it is “important that forex moves in line with fundamentals”, and that he is “watching forex with a high sense of urgency”. The comments clearly represent a step up in the level of concern displayed by Japanese officials over the recent sharp sell-off for the yen as USD/JPY moves back within touching distance of the highs from recent years. It supports our view that it will be more difficult for the yen to weaken further beyond the low 150.00-levels as the threat of intervention increases. Now that the BoJ has started to tighten monetary policy, Japan has stronger grounds to intervene if the yen was judged to have diverged from fundamentals.

While USD/JPY is still trading below the highs from recent years at just below the 152.00-level, GBP/JPY has just risen to its highest level since 2015 after breaking above the 190.00-level. After the setback for the US dollar overnight, the pound is now the best performing G10 currency year to date heading into today’s MPC meeting. The pound has benefitted so far this year from expectations that the BoE is likely to be slower than the Fed and ECB when starting to cut rates. A view that will be tested today when the BoE’s provides its latest policy update. Core inflation and wage growth have both slowed since the BoE’s previous policy meeting which we expect the BoE to acknowledge at today’s MPC meeting. It could result in MPC member Haskel dropping his vote for a hike at today’s meeting. The BoE would have to provide a stronger signal that it could cut rates sooner in May or June to trigger a significant correction lower for the pound today.             

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:30	SNB Interest Rate Decision	Q1	1.75%	1.75%	!!!
GE	08:30	German Composite PMI	Mar	47.0	46.3	!
NO	09:00	Interest Rate Decision	--	4.50%	4.50%	!!
EC	09:00	Current Account	Jan	32.3B	32.0B	!
EC	09:00	S&P Global Composite PMI	Mar	49.7	49.2	!!
UK	09:30	Composite PMI	--	53.1	53.0	!!!
UK	12:00	BoE Interest Rate Decision	Mar	5.25%	5.25%	!!!
US	12:30	Current Account	Q4	-209.0B	-200.3B	!!
US	12:30	Initial Jobless Claims	--	212K	209K	!!!
CA	13:35	BoC Deputy Governor Gravelle Speaks	--	--	--	!
US	13:45	S&P Global Composite PMI	Mar	--	52.5	!!
US	14:00	Existing Home Sales	Feb	3.95M	4.00M	!!!
US	14:00	US Leading Index (MoM)	Feb	-0.2%	-0.4%	!!

Source: Bloomberg