Written by Convera’s Market Insights team
Yen surges on expected intervention
George Vessey – Lead FX Strategist
All eyes were on the Federal Reserve’s (Fed) meeting yesterday, but it was yet another suspected round of intervention by Japanese authorities which stole the show as the Japanese yen surged over 2% in minutes, sending shockwaves through FX markets.
The Japanese Ministry of Finance (MoF) took yesterday’s weaker than expected US macro data and neutral Fed meeting as an opportunity to intervene on FX markets for a second time this week. Policymakers likely had the intent to shock speculators and make interventions more unpredictable. USD/JPY fell sharply to precisely ¥153 yen from about ¥157.55. Meanwhile, having spiked to ¥200 on Monday, GBP/JPY dropped below ¥192 yesterday, in what was another six-sigma move across multiple JPY crosses. The yen has pared a chunk of its gains already though, with both USD/JPY and GBP/USD up almost 1% this morning.
The intervention goes against the thesis of a particular line in the sand and points to the MoF / Bank of Japan wanting to shock markets, make policy more unpredictable and to make betting against the yen more difficult.
Powell’s dovishness softens the dollar
George Vessey – Lead FX Strategist
As expected, the Fed signalled fresh concerns about inflation while opting to keep interest rates at a 23-year high yesterday. The decision was again unanimous following a slew of data that pointed to lingering price pressures in the US economy. US yields fell and the US dollar weakened though as Fed Chair Powell ruled rate hikes “unlikely”.
US rates have seen a significant repricing with markets now pricing in about one rate cut by year-end, down from the three cuts priced in at the time of the March decision and six cuts at the start of the year. Naturally, this raised the bar for Chair Powell to out-hawk the market. Ultimately, investors were bracing for a hawkish presser from Powell, and although there was a clear message that it would take “longer than expected” to gain the level of confidence on inflation’s trajectory needed to lower interest rates, the Fed Chair also noted insufficient evidence to warrant further policy tightening. This soothed investors’ nerves of a potential rate hike this year. Equities and Treasuries rose, and the US dollar index fell from 106.2 to 105.7 in under an hour.
The Fed is prepared to leave interest rates at current levels until more progress on inflation is made or the jobs market clearly weakens though, and this will continue supporting the high yielding US dollar. However, today’s meeting could be remembered as the peak of implied hawkishness, and thus cap further USD gains going forward.
Pound capitalises on weaker dollar
George Vessey – Lead FX Strategist
Similar to many major currencies overnight, the pound has capitalised on the weaker US dollar following the Fed’s statement and presser yesterday. GBP/USD is trading back above $1.25, a whisker away from its 200-day moving average resistance level, which needs to be overcome for scope at further upside.
GBP/USD strength in the early part of 2024, owing to G7-leading UK inflation, has unravelled recently as Bank of England (BoE) rate expectations have fallen, converging with the US. and other major economies. With UK rate expectations more dovish than current Fed rate expectations in terms of timing of initial rate cuts and depth of cuts, GBP/USD is likely to struggle building on this week’s gains.
To see sterling stretch back towards the higher realms of the $1.20s requires more progress on weaker US inflation and a renewed pricing in of cuts from the Fed for 2024/2025. Although price action has become choppier over recent weeks, realised volatility in GBP/USD still remains compressed relative to the last couple of years.
Euro gains after Fed
Ruta Prieskienyte – FX Strategist
The euro climbed to $1.0720 as the Fed reaffirmed its policy stance, but admittedly came across less hawkish than markets feared. The analysis of historical data indicates that on average US dollar tends to sustainably recoup its losses against the euro, as well as other G10 peers, after initial post-FOMC price volatility. With 1-week EUR/USD risk reversals skews narrowing to a 1-week high, a sign that investors are scaling back on bearish euro bets, the said process may be slow this time round, but the gains will soon be challenged at tomorrow’s NFPs. With FOMC out of the way, the focus will soon shift to the ECB which is due to deliver its first rate cut in just over the month. Overnight, the swap implied probability of the cut at the next meeting fell to 75.7% – the lowest since Mar 18th, driven by lower bonds across the curve in both Eurozone and the US.
Despite FOMC’s hypnotising effect, there was no shortage of excitement across other euro crosses. EUR/CHF recorded a fresh 3-week high, trading firmly above CHF0.9800 level, eyeing cycle highs at CHF0.9849. Overnight implied volatility climbed to the highest level since Mar 21, implying markets expect a choppy trading session following today’s Swiss inflation print. Meanwhile, EUR/CAD appreciated to a 3-week high above C$1.4200, amid Loonie weakness. Investors are ditching the Canadian dollar as the latest GDP figure earlier this week revealed the economy in Q1 has lost momentum yet again as was then further confirmed by the ISM Manufacturing PMI dropping to 49.4, below market consensus. Pressure mounts on the BoC to cut rates soon before the domestic economy fades into a recession, with the implied market probability of a June cut increasing to 55%. Elsewhere, it appears that suspected BoJ intervention failed to sustain yen rally. Having appreciated for two consecutive sessions, EUR/JPY plunged sharply 2.5% at the New York close – signs of BoJ’s visible hand driving the move. In the options market, 1-week EUR/JPY risk reversals widened to 1.78% in favour of puts, a move that indicates investors are looking forward to further yen gains.
The domestic economic calendar is once again quiet, with no ECB officials scheduled to speak either. Final HBOC manufacturing PMIs are due shortly this morning but are likely to be largely ignored as investors continue to dissect FOMC postmortem.
Oil down 4% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 29 – May 3
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
