FX Insights 3/26

The Federal Reserve raised its borrowing rates by 25bps last week, but came just short of being hawkish, as revisions to the path of rates and growth forecasts came in line with expectations. During the following press conference, Chair of the Federal Reserve, Jerome Powell seemed to downplay recent inflationary expectations commenting, “There is no sense in the data that we are on the cusp of an acceleration of inflation.” Furthermore, the Fed’s policy statement introduced the phrase “moderation” in place of “solid” when describing economic activity. In summary, the market continues to look for two further 25bps rate hikes this year and three in 2019.

The Fed aside, markets have quickly shifted attention back to global trade concerns. An executive order signed by President Trump last week to impose tariffs on imports from China incited a global correction in equities. The Dow posted its worst loss (700 points) since February 8th and tumbled an additional 300 points on Friday. However, fears of an all-out trade war have eased this week as reports indicate the U.S. may negotiate with China. Treasury Secretary, Steven Mnuchin, stated he was “cautiously hopeful” on a deal being reached. Whatever the outcome, renewed trade protectionism and its various indirect effects will remain a crucial narrative for markets in the near term. Beyond political drivers, the dollar sees data released on personal consumption expenditure, the Fed’s preferred measure on consumer inflation, and a third estimate of fourth quarter growth later this week.

The focus of trade restrictions on China has in part helped the Canadian dollar, as scrutiny on trade eases up on the U.S. ally. Reports of progress on NAFTA negotiations and a strong consumer inflation print helped the Canadian dollar see a weekly gain against its U.S. counterpart following nearly a month of underperformance. This week is light on data releases for Canada, the only material release being monthly GDP which is expected to stay flat at 0.4% in Q1. The lack of news in Canada could help the Canadian dollar as the U.S. dollar continues to face uncertainties on its own domestic front.

A host of surveys in the EU and Germany last week revealed mixed economic sentiment while purchasing managers’ indices indicated a slowdown in activity in March. Despite the mixed data, the euro managed to remain range-bound last week as dollar selling following the FOMC led to some euro strength. In the near term, the euro does not have any obvious drivers and seems to have exhausted most of its positive central bank sentiment given the recently communicated policy shift. As a result, the euro could find itself threatened by rising yields in the U.S. should its own economic fundamentals remain placid. March Inflation figures for the eurozone’s four biggest economies, led by Germany, highlight the data calendar this week.

Solid labor and consumption figures overcame weaker than expected inflation data last week to help lift the pound near 2-month highs. Last Wednesday’s labour market report showed unemployment reaching its lowest levels since 1975 and wage growth increasing by 0.3%, solidifying market expectations for a May rate hike. A final reading of the UK’s fourth quarter GDP released Thursday is expected to confirm 0.4% quarterly growth. While Brexit remains an ever present narrative for the pound, a recent agreement for a 21-month transition period with the EU should keep the pound clear of any Brexit risks this week.

The yen could see further strengthening pressure given increasing safe-haven demand due to trade war concerns and political risks—both domestically and in the U.S. With many of these same drivers driving risk sentiment for equities, expect USDJPY to closely track equity action this week.

Sources: Bloomberg, Wall Street Journal, Reuters, Barclays, Bank of America, Econoday, 4cast