Source: Pixabay

June 17, 2021

FOMC forecast 2 rate hikes in 2023, hikes  2021 GDP and PCE forecasts

Fed still thinking about thinking about tapering

US dollar consolidates gains and opens substantially higher vs Wed. open

USDCAD open 1.2318-21, Overnight range 1.2265-1.2345,  Previous  close 1.2278

FX at a Glance

FX Recap and outlook

The market wanted a hawkish Fed  meeting, and the market decided the Fed delivered.  The FOMC raised  their forecast for 2021 GDP growth to 7.0% (March forecast 6.5%), and the Core PCE inflation forecast to 3.0 (March 2.2%).  And if that wasn’t hawkish enough, they tossed in projections for 2 rate hikes in 2023.

Wall Street stocks were sold with the Dow Jones Industrial Average shedding 0.77%, while the S&P 500 dropped 0.54%, and the NASDAQ lost 0.24%.  The equity losses occurred in the context of record gains and the magnitude of the post-FOMC losses are rather miniscule.

Chart  Wall Street Major Indexes YTD

Source: Koyfin

US 10-year Treasury yields surged to 1.586% from 1.48% before the FOMC statement.  At first glance, it appears bond traders are buying what the Fed is selling.  However, despite the 0.106% rise, 10-year Treasury yields are still 0.20% lower than at the end of March, when only one rate hike was predicted.

The US dollar opened with sizeable gains against the major G-10 currencies compared to yesterday, in part because traders stale short dollar positions.  Nevertheless, the US dollar index suggests the US dollar downtrend remains intact while the USDX is below 92.00.

Fed Chair Jerome Powell went on for great length to explain why the “dot-plot projections’ should be taken with a “big grain of salt.”  Markets did not want to hear the message.

Today’s US Jobless Claims and Philadelphia Fed Manufacturing Survey reports were met with a modest dip in the US dollar.  Initial Jobless Claims rose 412,000 compared to the forecast for a 359,000 increase.  The Philadelphia Fed Manufacturing Survey dipped to 30 from 31.5 previously.

EURUSD dropped below support in the 1.1980-1.2000 area, triggering stop-loss selling, and prices plunged to 1.1930 in NY today.  The contrasting monetary policies between the dovish ECB and now-hawkish FOMC fueled the selling.   Eurozone data was as expected and not a factor for traders.  ECB Chief Economist Philip Lane underscored the contrast today, saying  it was premature and unnecessary to discuss ending ECB PEPP purchases.  A break below 1.1910 targets 1.1835.

GBPUSD snapped the uptrend line from June 2020 with the move below 1.3990, setting the stage for a retest of support at 1.3770.  GBPUSD remains overbought, with  HSBC FX research noting that long GBP positions are at or near extreme levels that have only been seen a handful of times in the past decades.  The FOMC rate projections have eroded one area of GBP?USD support.

USDJPY rallied to 110.80 from a pre-FOMC level of 109.80 with the gains fueled by broad US dollar strength and the jump in US 10-year Treasury yields to 1.58%.  The Japanese government will lift the state of emergency in Tokyo on June 20.

AUDUSD and NZDUSD dropped alongside the other majors on the back of FOMC-fueled, US dollar demand.  Traders ignored Australia’s blow-out employment report showing a gain of 115,200 jobs (forecast 30,000).increase.  New Zealand Q1 GDP rose 1.4% q/q, easily beating estimates for a 0.5% gain.

USDCAD rallied yesterday, consolidated gains in Asia then resumed climbing in Europe and early NY trading.  The forecast for two US rate hikes trumped the Bank of Canada’s previously announced plan to raise rates in 2023.  USDCAD gains were exacerbated as bearish USDCAD bets were stopped out.  USDCAD may have further upside, but WTI oil prices trading around $72.00, combined with downtrend resistance in the 1.2420-40 area, suggest the easy money has been made.  Yesterday, BoC Governor Tiff Macklem warned of choppy growth in Q2 from the third wave coronavirus.

Today’s US data includes Philadelphia Fed Manufacturing Survey, and weekly jobless claims.

USDCAD technical outlook

The USDCAD technicals are bullish.  The June uptrend line is intact above 1.2120 guarded by support at 1.2200 and 1.2260.  The year long downtrend line comes into play in the 1.2420-40 area.  For  today, USDCAD support is at 1.2310 and 1.2280  Resistance is at 1.2360 and 1.2405.   Today’s range 1.2290-1.2380.

Chart USDCAD daily

Source: Saxo Bank

FX open, high, low, previous close

Source: Saxo Bank