US Dollar Benefits From Hawkish Fed Language, Euro In Demand

Risk-off trading conditions, triggered in part by a rise in US yields amid hawkish Fed rhetoric, saw US equities dip on Thursday and the safe-haven US dollar outperform, especially against its more risk-sensitive G10 peers like the Australian, New Zealand and Canadian dollars.

The US Dollar Index (DXY) reversed an earlier dip below the 100.00 level to rally back into the 100.60s, where it trades with on-the-day gains of about 0.3%.

Fed Chair Jerome Powell, as expected, signaled that 50 bps rate hikes at upcoming meetings were likely and the usually more dovish leaning FOaMC member Mary Daly even mentioned the possibility of a 75-bps move.

AUD/USD and NZD/USD traded with respective losses of 1.0% and 1.1%, with the latter performer a tad worse following Thursday’s not as hot as feared New Zealand Q1 Consumer Price Inflation figures. USD/CAD, meanwhile, rallied from under 1.2500 towards the 1.2600 mark, as stronger oil prices failed to offer the loonie respite.

As for the other major G10 currencies, the euro was the second-best performer on the day, with ECB President Christine Lagarde not saying anything new in her remarks at an IMF panel, but the normally more dovish leaning ECB Vice President Luis de Guindos earlier in the day hinting at the possibility of a first rate hike in July. His remarks seemed to endorse those recently made by some of the ECB’s more hawkish members in recent days pushing for a July hike and saw ECB tightening bets upped as a result.

This supported EUR/USD at the time, with the pair rallying as high as its 21-Day Moving Average in the 1.0930s in early European trade, only for the pair to then reverse 100 pips lower to the low 1.0800s during US trade as the buck regained ground, where it now trades about 0.2% lower on the day. GBP/USD saw similar price action, attempting to break above its 21DMA in the 1.3075 area only to then reverse back to the 1.3025 region where it is now trading lower by about 0.3% on the day.

Meanwhile, higher yields in the US (and elsewhere) saw the yen struggle, though albeit perform a little better than its risk-sensitive peers amid safe-haven demand as stocks fell. USD/JPY gained about 0.4% to rally into the 128.30s, with the bulls eyeing a potential retest of earlier multi-decade highs above 129.00 if 1) US yields keep pushing higher and 2) the BoJ keeps reiterating its dovish stance and defending its yield curve control target range.

In the coming session, flash PMIs will be released across the world, though probably won’t impact FX markets much amid all the focus on central banks, policy divergence and yields. UK and Canadian Retail Sales figures for March should garner some interest, as well as more remarks from ECB President Lagarde and BoE head Andrew Bailey.

“Inflation will be higher if the prices of energy and other commodities increase further and new supply bottlenecks arise”, according to Lagarde who also said that “We continue to carefully monitor risks to the inflation outlook. Our monetary policy will depend on the incoming data and our evolving assessment of the outlook.”

“In the current conditions of high uncertainty, we will maintain optionality, gradualism and flexibility in the conduct of monetary policy”, she added.