When the Fed met back at the beginning of the month and raised rates by 75bps, a move which was in line with expectations, the statement leant into a narrative that the central bank was aware that lags in monetary policy might require a slower pace of hikes going forward.
This wasn’t too much of a surprise given the number of hikes that have already taken place. There was also concern about policy lags which might require the Fed to slow the pace of hikes, and assess the effects of what they’ve done so far.
The markets liked the sound of this until we got to the press conference and the Q&A with Powell got under way, and he deviated from the tone of the statement by quite some way.
Last night’s Fed minutes reaffirmed the initial market reaction to the Fed statement earlier this month with most officials backing the slowing of the pace of hikes soon, with several officials seeing risks from further rapid hikes. This tone reinforces the narrative that 50bps is coming in December with subsequent hikes likely to be between 25bps and 50bps.
That’s not to say that members didn’t hedge those bets with an expectation that rates might peak at a higher level than envisaged, to offset any misconceptions that the Fed might be going soft, but for now markets appear to be going with the smaller hike narrative, rather than the Powell hawkish theme.
This higher for longer narrative turned out to the bit of the minutes that Powell decided to focus on in his press conference, pushing hard on the point that the Fed would need to go higher and probably for a lot longer, and which prompted the sell-off in equity markets and surge in both the US dollar and in yields at the start of the month.
Those upward pressures have eased since then with the US dollar sliding back steadily to where we are now.
The greenback had already been on the back foot leading up to the release of last night’s minutes, and that weakness continued in the aftermath of the release of the minutes, with US stock markets moving up to the highs of the day, and the S&P500 testing its 200-day SMA.
Last night’s positive US finish doesn’t look as if it will give markets here in Europe a significant early leg up, with the FTSE100 feeling the drag from further weakness in oil prices on the back of rising covid cases in China, however trading is quite likely to be light in the absence of the US for the Thanksgiving break.
The euro also pushed through its recent highs above 1.0400 as well as the 200-day SMA, in a move that could herald further US dollar weakness.
As we look ahead to today’s price action the latest German IFO Business survey ought to reflect a similar uptick to the ones we saw in the flash PMI’s yesterday, although business confidence is still expected to remain weak.
The decline in energy prices that we’ve seen over the past few months not only appears to have prompted an improvement in economic sentiment on the ZEW measure, but in yesterday’s PMIs as well, picking up a touch from their disappointing October readings which fell to their lowest since June 2020. The October IFO survey saw the business climate fall to its lowest levels since May 2020, but crucially not below the Covid lows. Today’s survey for November should see an improvement to 85 from 84.3
On an expectations basis sentiment fell even more sharply and will be the hardest measure to see any sort of rebound given that the mild weather so far is likely to give way too much colder weather and a more difficult energy price environment. Nonetheless this is expected to improve to 77 from 75.6.
EUR/USD – retested pushed above the 1.0400 and 200-day SMA area, with a clear break above the highs this month at 1.0480, targeting a move towards the 1.0600 area. A break of support at the 1.0180 area retargets parity.
GBP/USD – has moved through the 1.2000 area and looks set to test the 200-day SMA at 1.2200. We have support back at the 1.1870 area.
EUR/GBP – slipped down to the 0.8585 area, and through the trend line support from the August lows, before rebounding. Continues to look heavy while below the 0.8780 area. Next target is the 200-day SMA at 0.8530.
USD/JPY – the failure to move through the 142.50 area has seen the US dollar slide back below the 140.30 area, potentially opening a move back towards 137.80 and the recent lows.