Markets
Fed chair Powell announced the central bank will seek inflation that averages 2% over time rather than just aiming for 2% on a bygones-are-bygones basis. With the policy shift, inflation is allowed to overshoot the 2% target but “moderately” and “temporarily”, soothing any market fears of run-away inflation. At the same time, it means no monetary tightening for a long time to come. Powell also announced a more general objective regarding a “broad-based and inclusive” employment. He refrained from setting an unemployment target though. Powell, but also other Fed members following the speech including Kaplan, did seek to downplay the “fixed” character of this new framework, saying it’s not a formula neither a commitment. US yields traded volatile but eventually soared 6.4 bps (10-yr) to 9.7 bps (30-yr) higher. Interestingly, the upward pressure came from rising real yields this time rather than building inflation expectations. The US10y yield neared the upper bound of the broader 0.54%-0.78% trading range. The German Bund added 2.4 bps at the very long end of the curve. The US dollar sat on a rollercoaster. EUR/USD jumped towards the 1.19 big figure shortly after Powell’s announcement only to decline sharply towards 1.176 in the minutes thereafter. The pair eventually closed only slightly lower in the 1.182 area (down from 1.183). Gains vs. the Japanese yen were more obvious, with USD/JPY jumping from 106 to 106.57. EUR/GBP suffered from the shockwaves in EUR/USD, briefly dipping below key support at 0.8945 but closing just above eventually.
The Fed’s shift reverberates through Asian markets as well. US yields continue to advance up to 4 bps, taking other yields (including Australia) in its slipstream. Japanese yields rise 2.6 bps at the long end of the curve, even as PM Abe announced his resignation. Stocks in Japan underperform this morning (-1%). After holding up rather well yesterday, the greenback is now struggling quite hard. USD/JPY falls to 106.4. USD/CNY continues its losing streak (6.877). The PBOC for a second day straight set the fixing rate for the yuan weaker than expected. EUR/USD surges towards 1.187.
Barring EMU economic confidence (expected to increase from 82.3 to 85), the eco calendar is empty. The Fed’s regime change is to dominate European trading. The significant US bear steepening will probably also push German yields higher, an effect we also witness during Asian dealings. We’re a bit more cautious on further increases in US rates with US yields nearing important resistance levels, the upward potential of real yields still limited and the Fed still very much present. In this respect, the dollar could remain weak. EUR/USD 1.1916 is the first, but probably very solid, resistance. The British currency trades quite strong recently, holding near important resistance levels to the euro at around EUR/GBP 0.895. Today’s BoE governor Bailey speech at the Symposium will be key. Any hint on the mere possibility of negative rates could force sterling to rethink the recent strengthening and push EUR/GBP back higher towards 0.90, where we think the currency belongs from a more fundamental perspective.
News Headlines
Japanese public broadcaster NHK confirmed this morning rumours that Japanese PM Abe would quit because of health reasons. He doesn’t want his personal issues to conflict with governing. Abe will give more details at a press conference scheduled for 10 am CET. The Japanese yen strengthens in a first reaction with USD/JPY moving to the low 106 area. Japanese stocks lose over 1%.
ECB Villeroy de Galhau that the ECB’s policy review could also change the way it defines its mandate of maintaining price stability after years of undershooting the below, but close to 2% goal. ECB Chief Economist Lane stressed the central bank’s two-stepped approach: “Once the negative shock has been sufficiently offset, the second stage is to ensure that the post-pandemic monetary-policy stance is appropriately calibrated in order to ensure timely convergence to our medium-term inflation aim.”
