After days of relentless ascent, which propelled the Bloomberg Dollar Index to record levels and the DXY to levels not seen since the start of the century, the dollar has tumbled overnight - despite reportedly very hawkish rhetoric from Jerome Powell on Thursday at the Cato Institute - sliding the most in one month to Sept lows.
What's behind the move? Here is the hot take from Goldman FX trader Victoria Hampson.
Whilst EURUSD closed yesterday sub parity after jostling in a choppy manner post-ECB, the subsequent digestion/and re-read of the ECB has seen most settle on it being hawkish. While the Council signalled that the 75bps hike frontloads the normalisation process, President Lagarde also stressed that policy rates remain "far below" levels that ensure return of inflation to 2% and that further hikes "over the next several meetings" will likely be appropriate to slow demand and avoid persistent upward pressure on inflation expectations. This morning Bloomberg has also reported that ECB officials are prepared to deliver another 75bps increase at their October meeting if the inflation outlook warrants an additional big step. Our economists have changed their forecast overnight in the wake of yesterday’s meeting and now expect the Governing Council to deliver another 75bp at the October meeting (vs 50bp before), followed by 50bp in December (vs 25bp before) and 25bp in February. They thus raised their projected terminal rate to 2.25% (vs 1.75% before), with policy moving more clearly into restrictive territory. With USDJPY also on the slide (more below) the digestion of the ECB has seen EURUSD finally squeeze higher this morning with the pair testing 1.0100 early Europe above which a run towards 1.0185/1.0200 looks possible.
Fueling the USD weakness along with the EURUSD move, has been a) better risk sentiment with equities rallying across the board this morning with some slightly more positive noises coming out on the China property front, and b) the verbal commentary continuing out of Japan.
After yesterday’s meeting of BoJ/MoF/FSA, this morning has seen Kuroda hold a meeting with Kishida with Kuroda telling reporters afterwards that “Sudden moves in foreign exchange rates increase uncertainty for firms and are undesirable,” and “A two to three yen move against the dollar in a single day is very sudden.” Chief Cabinet Secretary Matsuno has also been on the wires early Europe citing that they will closely coordinate with BoJ and currency authorities in other countries. Clearly none of this is anything new, and the market still needs to see something concrete to really call for a turn in USDJPY, but with the pair having accelerated higher earlier this week (and likely pulled in some longs at bad lvls) and with the USD already on the backfoot elsewhere, USDJPY has slipped back towards 142.00 having started the day closer to 144.00.
In the day ahead the data calendar is limited, and given this morning’s moves, and some impending holidays in Asia on Monday, it is likely we could see some further position trimming ahead of the weekend. Whilst I don’t think we have seen huge additions to USD length this week despite the moves in the first half of the week , there are certain pairs where USD length is more stretched – GBPUSD in G10, and CNH/TWD/KRW in EM, which may be susceptible if the move runs a little further. As discussed yesterday our research team still think there is more ways for US real yields to move higher over time than lower, and there is room for the market to price a higher risk of hikes extending into 2023 which should keep the environment as still broadly USD-supportive, however one of the risks discussed was a step up in hawkishness in policy outside of the US which is what we saw from the ECB yesterday.