The USD is trading somewhat higher, pushing the DXY to a new cycle high (99.82) as the index extends gains from the March consolidation range. FOMC minutes yesterday delivered what was largely expected—a hawkish perspective on rates—and some clarity on the modalities of balance sheet reduction, which could start in May and ramp up to USD95bn/month shortly after. That is sizeable—the 2017 balance sheet reduction process started at USD10bn—but circumstances warrant a speedier wind down. Markets weren’t quite sure how to take it all initially—the signaling on rates was not unexpected but it was hawkish and balance sheet reduction moves were significant but not out of line with expectations. However, the Fed’s policy stance is supportive of additional USD gains generally we feel. While tighter policy is more or less fully priced into the swaps curve, the Fed’s stance contrasts with the position of most other major central banks; yield spreads support the USD (and make shorting it a relatively expensive trade). Sanctions risks and the French presidential election (first round Sunday) are, meanwhile, clear headwinds for the EUR and add to broader USD support. Commodity FX has borne the brunt of the USD advance overnight, with the AUD, NZD and CAD under-performing. The MXN is one of the better performers, however, ahead of today’s CPI data. Asian stocks dropped sharply but European equities are firmer and US equity futures are advancing modestly. Major bond markets are firmer, paring 10Y yields 2-4bps. Crude is steadying as markets digest this week’s news of reserve releases. The Fed’s Bullard speaks at 9.00ET on monetary policy; Evans and Bostic talk later on employment inclusivity.
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Cable held roughly within yesterday’s trading band in overnight price action amid limited domestic drivers. The BoE’s Pill’s address at 8.15ET is the highlight of the day (and the week, in fact). The bank’s chief economist may provide some insight into the BoE’s rate outlook which we think sees a much lower year-end rate than what markets are expecting. BoE officials are not known for providing a lot of forward guidance and Bailey has scaled it back in recent months. Thus, the realisation for markets that the bank is not hiking by as much as they expect may not hit until its rate decision a month from now—which risks a sharp correction in the GBP. Next week’s release of payrolls and inflation prints for March could add fuel to the fire. The pound should mostly follow the broad USD tone through the emainder of this week.
