Yesterday afternoon saw EURUSD kick into life. Initially, with US Treasuries still continuing to be bought in droves, demand for the US Dollar was weak. The market had a key technical level of 1.19 in its sights and rode towards it throughout the morning session. A weak private employment report (US ADP data) gave markets the narrative to tentatively push the Dollar lower. Versus its opening price the Dollar was down 0.3% with the Euro and commodity currencies deriving strength from its weakness. Having just scraped the 1.19 level, this trend reversed. It was the speech from Vice President of the Federal Reserve, Richard Clarida, that caused a complete reversal of the Dollar’s fortune. As Treasuries rapidly sold off, raising the yield on benchmark treasury notes, the Dollar followed suit posting an almost immediate 0.6% gain. Amidst an otherwise low-volatility session, the reversal in USD stands out on most Dollar-denominated charts.
The comments from Richard Clarida were surprisingly hawkish versus what the market had expected. The content of what the Vice President of the Reserve offered in its speech were not dramatically outside of the wider position of the Fed. Even today, placing Clarida on the Fed’s dot-plot following his speech yesterday would not see him land as an outlier amongst the Reserve’s voting members. Instead, confirmation that the more hawkish tilt that has recently been seen coming from the Federal Reserve is derived from key members of the central bank rather than more peripheral voting members encouraged markets to buy into monetary tightening in the United States yesterday.
What Clarida offered to markets was his confirmation that he can see the Fed announcing the tapering of bond purchases later this year – something that has been consistent with the market’s base-case since the last two Fed meetings took place. At the moment, the market is speculating that this announcement could come as early as the Jackson Hole Symposium. This event has historically been an opportunity for the central bank to speak more openly and freely on market forces and has previously marked a point on the calendar for an inflection in the rhetoric surrounding monetary management. Even slightly ahead of market expectations, the Vice President of the Federal Reserve also mentioned that it was likely in his view that interest rates could be raised before the end of next year. Alongside Chairman Jay Powell’s own comments, yesterday’s speech offered a similarly upbeat assessment of the US economy.
Those hawkish and pent up voices in the Federal Reserve system are increasingly likely to use the opportunity of their public engagements to comment on the state and path of US rate policy. Adding to the bid into the US Dollar, head of the Federal Reserve Bank of San Francisco, Mary Daly, confirmed last night that she also can see the Fed tapering QE programmes later this year or early next. The violent reaction serves as a timely reminder of the fragility of currency valuations as we break further into the recovery phase of the pandemic. Whatever the outcome of the Bank of England decision this afternoon, there are currently a further 7 members of the Monetary Policy Committee outside of the Governor himself that could move Sterling comparably quickly.
Discussion and Analysis by Charles Porter