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DXY is positioning for a hawkish FOMC after rebounding from Tuesday’s 107.7 low on the stronger-than-expected US CPI. It consolidated between 109.3 and 109.9 in the past two sessions. EUR gave back its post-ECB gains and is currently languishing in a 0.9960-1.0020 range from Monday’s high of 1.02. The ECB’s jumbo 75 bps hike last week was a double-edged sword. While positive in closing the gap with Fed hikes, it also adds to the energy crisis seen pushing the Eurozone into recession this winter. GBP is weak after depreciating 0.6% to 1.1467 yesterday, its lowest close since March 1985. The Bank of England’s second 50 bps hike (consensus) on 22 September will fall short of the Fed’s third 75 bps hike a day earlier.
The Dow, S&P 500 and Nasdaq Composite fell 0.6%, 1.1% and 1.4% respectively. The World Bank did not rule out significant financial stress and a global recession from central banks forcefully tightening monetary policy at the fastest pace to bring down elevated inflation. The US Treasury 2Y yield firmed 7.7 bps to 3.865%, its highest close since October 2007. The 10Y yield firmed 4.5 bps to 3.449%. Consensus is convinced that the Fed will deliver a third 75 bps hike to 3.25% at the FOMC meeting on 21 September. Futures see the Fed Funds Rate ending the year above 4% and hikes extending to 4.5% into early 2023. Markets have taken the Fed’s guidance after Jackson Hole very seriously.
Today, consensus expects the University of Michigan (UoM) to report an improvement in consumer sentiment to 60 in September from 58.2. Given the stronger-than-expected CPI readings on Tuesday, 1Y inflation expectations might not slow to 4.6% (consensus) in September from 4.8% in August. Yesterday, US initial jobless claims fell for a fifth week from a tight labor market to 213k during the 10 September week, its lowest level since the last week of May. July was also revised to 80.2% from 80.3%.
In Asia, Japan and China have been pushing back against depreciation pressures on their currencies from monetary policy divergences. Japanese officials are talking tougher to keep alive intervention risks. However, the Bank of Japan’s yield curve control policy remains a drag on the JPY amidst global tightening. USD/JPY tried twice in the past two weeks to break above 145, a resistance that will open the door to test 147.66, the high in 1998. Meanwhile, China’s forex reserve requirement ratio cut from 8% to 6% took effect on 15 September. Authorities have been setting the CNY stronger for more than ten sessions. They did not prevent the offshore USD/CNH from closing above 7 for the first time since July 2020. The onshore USD/CNY rate will likely follow if the USD powers into next week’s FOMC meeting.
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