Fed is Hawkish but FX is Wary

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Market Drivers February 28, 2018
Yen get hits with BOJ mini taper
EU Brexit draft
Nikkei 1.44% Dax -0.18%
Oil $63/bbl
Gold $1320/oz.
Bitcoin $10625

Europe and Asia:
EUR EZ Unemployment 5.4% vs. 5.4%
EUR EZ CPI 1.0 vs. 1.1%

North America:
USD GDP 8:30
USD Chicago PMI 9:45
USD Pending Homes 10:00

It’s been a quiet night of trade in the currency market with most of the majors contained to narrow ranges and yen slightly better bid after news that the BOJ tapered some of its 25 year JGB purchases.

USDJPY was trading near the 107.00 figure testing the session lows after it was revealed in the morning session trade that BOJ only bought 80B yen of 25 year JGBs verus 70B the period prior. The reduction was small, but nevertheless was taken as a sign by the market that BOJ may be starting to slowly temper its massive QE program as growth in Japan improves.

The pair was also subject to end of month flows but continued to see good two-way trade. Overall the takeaway from yesterday’s Powell testimony was that the Fed has moved to a more hawkish stance and will now focus more on price pressures rather than growth. That suggests that barring any unexpected slowdown in US growth the Fed is very likely to raise rates 3 times this year and as it follows through on its policy objectives, the interest rate differentials will begin to favor the dollar.

In meantime, however, the market appears to be reserving its judgment as USDJPY is unable to make a concerted effort to run the 108.00 figure. For now the best that can be said for dollar bulls is that the pair has made a clear bottom at the 105.50 level and continues to consolidate.

Looking ahead into the North American session, the market will get a look at the second revision of GDP which is expected to print a bit lower at 2.5% versus 2.6% eyed. Any surprise to the upside could provide the pair with jolt it needs to stage a rally, but if the data misses a retest of 106.50 support is quite possible.

Overall, on a week dominated by end of month flows and little meaningful economic data, the story in FX remains one of consolidation and range.

Boris Schlossberg
Managing Director

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