After a volatile night in markets, the dust has settled to leave major currency pairs trading roughly in line with their closing value at the European close yesterday. The Federal Reserve’s decision last night saw trading ranges just shy of 1 cent prevail within major USD crosses. The market initially reacted by selling off the US Dollar as the initial message was received of no hike, no taper, no change. However, as the decision and the Fed’s all-important dot plot were digested further, USD bulls found reason to buy the greenback once again. The fact that today the European market open sees some of the world’s most liquid FX pairs trade in line with their closing values last night does not mean last night’s event was much ado about nothing. The dynamics that created the opportunity for USD buying last night still exist. Rather it is the more robust performance of Asian equity markets overnight that are feeding into stronger risk conditions today where USD would typically underperform. Today’s market is less the boy who cried wolf and more the dove who cried hawk.
When commentary on central banks relates to ‘doves’ and ‘hawks’ it is referring to the persuasion of that central bank, or one of its rate-setting members, to have a persuasion to tighter or looser monetary policy. Tighter monetary policy includes initiatives to taper existing asset purchase (or QE/money printing) programmes or, more significantly, to raise underlying interest rates. Those in favour of such measures are called hawks. Conversely, those pushing for looser policy are referred to as ‘doves’. They typically, dependent on the context of the decision, are pushing for more accommodative low-interest rate, high-support, programmes to endure for longer or a further enhancement of monetary support altogether within their economy.
The Federal Reserve has flashed back and forth in recent policy decisions between calling for tighter and weaker policy as the recovery takes hold. Last night’s decision showed that enough members of the committee (9 in total) now expect a rate hike next year where they previously hadn’t. In addition, the chairman Jay Powell used some of his most convicted language to date on the path of the Fed’s record-setting asset purchase program. He said his bank could ‘easily move ahead’ with a taper at their next policy meeting in November. Given that credibility and forward guidance are the currency of central bankers, part of the USD’s lurch higher last night was down to the more convicted pricing in of economic recovery and monetary normalisation this year.
For this rather action packed week for FX, last night’s decision marks the half-way house with the Swedish, Japanese, and US central bank now having published their policy decisions. Today could hold further surprises in store with the Bank of England, Norwegian and Swiss central banks scheduled to release policy announcements. The partial recovery of GBP overnight could be speculating that the BoE could provide a similar hawkish surprise to the Fed last night.
Discussion and Analysis by Charles Porter