Dollar on the Front Foot: XM.com

Written by Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be read here.

The US dollar trades on the front foot today.

The buying of the dollar suggests that investors are likely expecting a hawkish outcome from today’s FOMC decision, and this is evident by the fact that they continued pushing back their rate-cut bets.

According to Fed funds futures, they are now pencilling in a 68% chance for a 25bps reduction in June, with the total number of basis points worth of cuts anticipated by the end of the year dropping to 75, in line with the Fed’s December dot plot.

Taking that into account, the Fed’s updated interest rate projections may be of major importance today.

With the U.S. economy faring better than most of its major peers and inflation proving to be stickier than expected, there has been speculation that the dot plot may be revised up to indicate two quarter-point rate cuts by the end of the year.

Such a decision would provide room for further upside adjustment to the market’s own implied path and thereby add more fuel to the dollar’s engines.

The yen was the main loser, tumbling more than 1.5%, even after the BoJ’s historic decision to end eight years of negative interest rates and entirely abolish its yield curve control policy.

With reports already preparing investors that policymakers may decide to press the hike button at this gathering, the decision came as no surprise, while the Bank’s announcement that they will continue government bond purchases with broadly the same amounts as before makes the abandonment of yield curve control not such a material change.

Combined with Governor Ueda’s remarks that they will maintain accommodative monetary policy conditions, the meeting’s decisions did not add any extra hawkishness to the market’s own perception.

Investors continued to believe that any subsequent rate increases are likely to be very gradual and slow as several members have telegraphed ahead of the meeting, assigning around an 83% chance for the next 10bps hike to be delivered in September.

For the yen to change course and begin a long-lasting recovery, data and headlines may need to start suggesting that another rate increase may be appropriate sooner than the market expects. Otherwise, further declines may trigger another round of verbal intervention by Japanese officials.

The Canadian dollar was also among the major losers, getting knocked down after the Canadian CPIs for February came in lower than expected, prompting investors to add to their BoC rate cut bets.

From 20%, the probability of a 25bps reduction at the Bank’s upcoming decision has risen to around 25%, while the total number of basis points worth of cuts expected by December has increased to around 75 from 65.

Today, it was the UK’s turn to release inflation numbers, with both the headline and core CPI rates for February coming in lower than anticipated. However, the pound barely reacted to the data, perhaps as traders preferred to avoid large positions ahead of tomorrow’s BoE decision.