FOMC shift in tone to undermine USD and helped by banking sector concern

USD: Weaker dollar more likely as Fed shifts its tone notably

The US dollar is sharply weaker today and for good reason – the overall tone of both the statement following the expected 25bp rate hike and the press conference by Fed Chair Powell was clearly more dovish. The FOMC is certainly placing more importance on the downside macroeconomic risks from the banking sector turmoil than the market in general was expecting given the market pricing before the meeting. The most crucial take-away was the change in policy guidance – gone is the reference to the FOMC’s anticipation that “ongoing increases in the target range will be appropriate” and instead we now have the anticipation that “some additional policy firming may be appropriate”. We believe this clearly opens up the potential for yesterday’s hike being the last.

A pause in the tightening cycle is not the formal signal with the median dot for 2023 still showing one further 25bp hike but we are unconvinced at this stage of that hike being delivered and see yesterday’s as more likely the last – but the banking sector health and data will ultimately determine that. But even Powell didn’t seem at all sure what might happen next. Our sense of Powell last night was someone concerned over near-term risks. The press conference was shorter than usual and he seemed keen to have it over with. He may have been concerned by the fact that US Treasury Secretary Yellen was speaking at the same time and clarified government policy by stating there was no discussions taking place over a “blanket” deposit guarantee for the banking sector. The S&P Bank Index fell 5.6% yesterday. The sector in the US is clearly underperforming Europe which we believe will reinforce EUR/USD support.

The Summary of Economic Projections revealed downgrades to GDP growth for this year and next (0.4% vs 0.5%; 1.2% vs 1.6% respectively) and the FOMC clearly see tighter financial conditions as having a meaningful impact going forward. Powell added that conditions are likely tighter than shown by standard measures given actual bank lending is not captured well. The US dollar low from early February is in sight and with banking sector confidence fragile once again we see high risks of that low for the dollar being tested. It is really a matter of monitoring US banking sector stocks for now.

US BANKING SECTOR SUBSTANTIALLY UNDERPERFORMING EUROPE

Source: Macrobond & Bloomberg

EUR: Trade swing adds further support

We have highlighted previously on numerous occasions the hugely negative implications for currencies like EUR, GBP and JPY from the historical terms of trade shock due to the surge in energy prices last year. We argued that it was impossible for that shock to repeat itself and for that reason the fundamental backdrop for those G3 currencies versus the US dollar would be a lot better this year.

Well, the ECB current account data released yesterday for January certainly is highlighting the positive impact, which is happening more rapidly than assumed given the scale of decline in natural gas and crude oil prices that have gone beyond our assumptions. The euro-zone current account surplus widened to EUR 17.1bn in January, from EUR 13.3bn in December, helped in large part by the expansion of the goods surplus from EUR 6.5bn to EUR 11.5bn. When natural gas prices hit the post-Ukraine invasion peak in August last year, the euro-zone ran a record deficit of EUR 36.2bn. Separate trade data showed that on a 12mth sum basis, the euro-zone energy trade deficit reached a record EUR 585bn in December.

The TTF natural gas price this week hit another low, breaking below EUR 40 MWh for the first time since July 2021. The crude oil price today is roughly similar to the summer of 2021 as well and back then the 12mth sum of the euro-zone energy trade deficit was EUR 165bn. So in essence this reversal of that record energy trade shock now under way could equate to over EUR 400bn on an annual basis of less outflow from the euro-zone. Of course, energy prices may not stay at these levels so the scale of change could be less but we are only therefore debating the scale of the positive development this ends up for EUR going forward as it is highly unlikely that the euro-zone will find itself in the same position as last year when TTF natural gas prices broke briefly through the EUR 300 MWh level.

This benefit for EUR will be similar for GBP and JPY this year as the 2022 energy ToT shock reverses. The only unknown really is to what extent this record shock reverses

EURO-ZONE RECORD ENERGY DEFICIT – THIS IS NOW REVERSING WITH A POTENTIAL EUR 400BN PLUS BENEFIT FOR EUR

Source: Macrobond

GBP: BoE to hike but maybe a guidance shift to hint at pause

The CPI data yesterday has certainly encouraged market participants to price with more conviction the prospect of a 25bp hike today from the MPC. The BoE forecast a YoY CPI rate in Q1 of 9.73% and ahead of March data the YoY in Q1 stands at 9.67%, so a MoM drop is needed in March, which seems unlikely. But for some measures Jan/Feb combined was less than the BoE assumed (core services) but on balance we suspect the MPC will deliver one final “insurance” hike – but it’s a much closer call than the implied near 100% certainty priced in the OIS market.

We would certainly argue that a hike today is unnecessary and a close call could be reflected in further division within the MPC. Seven MPC members voted for the 50bp hike to 4.00% in February while two (Dhingra and Tenreyro) voted for the policy rate to remain at 3.50%. The minority against a hike could grow. We will be watching the wording on policy guidance. In February the MPC stated that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”. The conditionality of this guidance could be flipped to signalling a pause based on the condition that inflation pressures subside as the BoE expected. A signal of a pause at this juncture would see rates lower and take GBP lower too although we suspect at lower levels GBP would quickly draw in fresh buying to limit the scale of decline. Any decline for GBP is likely a good buying opportunity in our view

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:30	SNB Interest Rate Decision	Q1	1.50%	1.00%	!!!!!
SZ	08:30	SNB Monetary Policy Assessment	--	--	--	!!!
EC	08:40	ECB's Stournaras speaks				!!
SZ	09:00	SNB Press Conference	--	--	--	!!!!
NO	09:00	Interest Rate Decision	--	3.00%	2.75%	!!!
EC	10:00	ECB's Holzmann speaks				!!!
EC	10:00	EU Leaders Summit	--	--	--	!
UK	12:00	BoE Interest Rate Decision	Mar	4.25%	4.00%	!!!!
UK	12:00	BoE MPC Meeting Minutes	--	--	--	!!!!
US	12:30	Chicago Fed National Activity	Feb	--	0.23	!
US	12:30	Current Account	Q4	-213.2B	-217.1B	!
US	12:30	Initial Jobless Claims	--	197K	192K	!!
US	14:00	New Home Sales	Feb	650K	670K	!!!
UK	15:00	BoE MPC Member Mann speaks	--	--	--	!!!!
EC	15:00	Consumer Confidence	Mar	-18.3	-19.0	!
EC	15:00	ECB's Lane Speaks	--	--	--	!!!

Source: Bloomberg