EUR/USD, GBP/USD, USD/JPY, USD/CAD: Fed hawkish pause

The Fed is set to upgrade GDP and lower core inflation forecasts for this year.

The US dollar continues to be one of the strongest currencies in the G10 after the FOMC meeting this morning at 4 a.m., following the dollar index’s recent peak at 105.51. As I have already mentioned multiple times, the Federal Reserve did not alter its policy rate today. The US rate market has tempered its expectations for rate cuts in 2024, a move that has boosted short-term US rates. Just yesterday, the 2-year US Treasury yield reached an intraday high of 5.11%, a level slightly below July’s peak of 5.12%. The market’s priced-in expectations for Fed rate cuts by the end of the next year have diminished to approximately -70 basis points.

There were no significant US economic releases yesterday. However, the release of Canada’s robust CPI report for August appeared to have an unusual ripple effect on the US Treasury market. This report triggered a more pronounced hawkish repricing in the Canadian rate market, providing further evidence that core inflation has increased in recent months. Over the last three months, annualized core inflation measures have risen by 4.5% in August. This development adds to the challenges faced by the Bank of Canada (BoC), which had expressed concerns about core inflation declining too slowly, remaining above 3.5%. As a result of this report, the Canadian rate market has adjusted its pricing to reflect a higher probability of a final BoC rate hike either at the end of this year or in early 2024, with 29 basis points of hikes now priced in by March next year. This hawkish stance in the Canadian rate market supports my short GBP/CAD trade idea.

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