Aussie dollar resurgent and USD under pressure as market pushes back against Fed guidance

Key Movers

There was ample to digest through trade on Thursday as the USD slumped below its pre-FOMC meeting level while the euro lurched higher following a hawkish ECB policy update. Markets continue to push back on Fed guidance of two more rate hikes, instead pricing in just 20 basis points of additional monetary policy tightening through the next two meetings. With the US economy spluttering there are growing calls for the Fed to announce an end to its tightening cycle. In contrast, the ECB lifted rates by 25 basis points overnight. While expected, an overtly hawkish post meeting statement and upward revision of CPI forecast fueled a hawkish market response and drove the euro off intraday lows near 1.08 toward session highs just above 1.0950. With the USD on the back foot, the GBP punched through 1.27 and 1.2750 to mark highs just south of 1.28, while the Japanese yen recovered early losses forcing the USD back toward 140, of highs above 141.50.

Our attentions turn now to US consumer sentiment data and the Bank of Japan’s policy meeting. We anticipate they will maintain an ultra-easy policy setting in stark contrast with other major central banks. Absence of a surprise shift in policy will likely weigh on the yen as the divergent monetary policy gap continues to widen. We are keenly attuned to any language that may hint at a future change in stance. With inflation forecasts due next month the BoJ may be forced into a policy shift.