After a major flattening of the US Treasury curve last week in the wake of the Federal Reserve Federal Open Market Committee (FOMC) meeting, this week will be important to determine how comfortable the Fed is with the market reaction to its shift in stance, with a number of speakers on tap including Fed Chairman Powell who testifies to Congress today.
In summary, the Fed FOMC was much less dovish than expected and acknowledged that they are formally thinking about thinking about tapering. The most obvious shift was in the Fed FOMC dot plot, with the median Fed official now expecting 50bp of tightening by the end of 2023.
Notably, St. Louis Fed President Bullard was even more hawkish on Friday, highlighting the prospects of a “late 2022” hike in US policy rates. Moreover, Fed speakers overnight did not walk back from the FOMC statement, with Presidents Bullard, Kaplan and Williams delivering views. Kaplan favours tapering “sooner rather than later”, while Bullard highlighted upside risks to inflation.
Nonetheless despite hawkish comments, markets have calmed somewhat following the sharp post FOMC reaction last week, which reeked of a major positioning squeeze. Longer end US Treasury yields move higher overnight while equities recouped losses and the USD weakened. Today most attention will fall on Fed Chairman Powell’s testimony before the House Select Subcommittee on the Coronavirus Crisis on “The Federal Reserve’s Response to the Coronavirus Pandemic.”
This week there are also several central bank decisions on hand. Yesterday, China’s central bank PBoC, left policy on hold for a 14th straight month. China is in no rush to raise its policy rate and will likely focus on liquidity adjustments to fine tune policy. Other central bank policy decisions this week will come from Hungary (today), Thailand (Wed), Czech Republic (Wed), Philippines, UK, and Mexico (all on Thu).
The NBH in Hungary is expected to hike policy rates, with both the 1 week depo rate and base rate likely to be hiked by 30bps. The Czech National bank is also expected to hike, with a 25bp increase in policy rates expected by consensus. All the rest are forecast to leave policy on hold. The key data releases this week will be the US May PCE report on Friday, which will likely reveal another sharp rise in prices.
Although the USD weakened overnight it still looks positive technically, with the dollar index (DXY) remaining above its 200-day moving and MACD differential remaining positive. The Asian dollar index (ADXY) marks an interesting level for Asian FX as its is verging on a break below its 200-day moving average around 108.2861. As such, the USD bounce may have a little more to run in the short term.
The euro (EUR) will be in focus to see if it breaks below 1.19, with the currency looking vulnerable on a technical basis to further downside. Similarly, the Australian dollar (AUD) is trading just below its 200 day moving average any may struggle to appreciate in the short term.