By Stuart Talman, XE currency strategist
As widely expected, the Federal Reserve has delivered an on-hold decision, maintaining the Fed Funds target rate at 5.00%-5.25%. The market has viewed the outcome as a hawkish hold, given the aggressive dot-plots that accompanied the decision.
US equity markets are mixed - the S&P500 logs a modest loss, whilst the Dow is down around two-thirds of a percent. The Nasdaq extends its winning streak, climbing for a fifth consecutive day, up around a three-quarters-of-a-percent.
The New Zealand dollar has ripped through 62 US cents, propelled higher during the early stages of US trade as weak US PPI data reported a softening in producer prices for final demand, falling from 3.1% to 2.8%. Prior to the release, NZDUSD had improved from 0.6150 to 0.6170 during European trade.
The Kiwi's gains accelerated following the soft data, ascending to an overnight high a few pips shy of 0.6340 before settling down ahead of the Fed's interest rate decision.
It’s the highest the Kiwi has traded since the RBNZ's dovish hike on 24 May sent NZDUSD into freefall.
Following the release of the on-hold decision, accompanying statement and dot-plots at 6AM, risk-sensitive assets, including the New Zealand dollar, immediately plunged. The key takeaways from the FOMC meeting:
- The Fed keeps target rate on-hold at 5.00%-5.25%
- New dot-plots project a terminal rate at 5.60%
- Forecasts for economic growth & core inflation rose
- Forecast for unemployment fell
The immediate reaction was risk-off given the hawkish set of dot-plots. The previous dot-plots, released on 22 March called for a peak rate at 5.10%. The new forecasts project the Fed Funds target rate climbing to range of 5.50%-5.75%, requiring two more rate hikes.
Within the 18 FOMC voting members, 9 are calling for two more hikes whilst three see even more tightening required, including one official calling for a policy rate north of 6%. On the moderate to dovish side, four FOMC members pencilled in one more hike whilst two doves believe that no additional tightening is required.
The dot-plots therefore represent an FOMC that is more hawkish relative to market pricing which favours a Fed skip - one final hike in July to end one of the historically aggressive tightening cycles.
The dollar's immediate spike higher drove NZDUSD sharply lower, falling from the 0.6220's through 0.6170.
However, risk-off moves were swiftly unwound during the FOMC press conference, Fed Chair Powell's tone failing to match the hawkish dot-plot projections.
Whilst Powell did acknowledge that core inflation was still too high and commented we want to see it move down decisively in addition to risks for inflation are still to the upside, he was reluctant to commit to additional hikes at upcoming meetings.
When asked about the near-term path for Fed policy and the likelihood of a Fed skip, Powell replied: the skip - I shouldn't call it a skip.
Providing something for the doves to cling to, the result was see-sawing price action over the last two hours of US trade.
US bond yields fell following the soft PPI data earlier in the day, ripped higher following the release of the statement/dot-plots and then fell again during Powel's presser.
The New Zealand dollar ripped back through 62 US cents, marking post-FOCM presser highs in the 0.6230's before easing back to start Thursday's local session near 0.6210.
The incoming macro data flow will be crucial to determine whether the market buys into the Fed's higher terminal rate call or sticks with the view that they are done after one final hike in July.
Looking to the day ahead, it’s as frenetic as it gets!
The ECB's rate decision is the headliner, the eurozone central bank expected to raise the main policy rate by 25bps to 4.00%.
It promises to be a lively local session given the release of 1Q GDP for the local economy, jobs number across the Tasman and retail sales out of China.
Retail sales for the US drops overnight as do the weekly jobless claims data. Last week's spike in initial jobless claims captured the market's attention, propelling risk assets higher on the view that a resilient US labour market is finally starting to soften in the wake of 500bps of Fed tightening. The data point is likely to take on more significance in the weeks ahead.
Given Wednesday's circa 1% rally we're looking for signs of consolidation for NZDUSD. Price action has tested the 100-day moving average, located in the 0.6220's, but was unable to log an intraday close above.
The 61.8% Fibonacci retracement of the May range is located at 0.6232.
Given the distance covered over the past 5 trading days (~3% rally), we suspect the Kiwi will take a breather ahead of a potential test of these important technical hurdles…..NZDUSD to consolidate around 62 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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