AUD forced to give up gains as USD exceptionalism buoyed

Key Movers

There has been plenty to digest through the last 24 hours as the USD extends its exceptional run higher amid weakness across Europe and China and a dovish response from the Bank of Japan (BoJ). It was expected BoJ policy makers would do away with their yield curve control program amid rising inflation pressures. Instead, despite raising their CPI forecasts, they opted to merely tinker at the edges lifting the cap on 10-year Japanese Government bonds to 1%. While affording flexibility to extend beyond 1% Governor Ueda vowed to continue with large-scale bond buying to ensure yields did not stay above 1% for long. The USD surged beyond ¥150 marking intraday highs just short of the October 2022 high at ¥151.70, a level that prompted BoJ intervention. In Europe Q3 GDP data printed below expectations, raising the prospect of a technical recession as early markers point to another negative print. The softer read is the last in a string of lacklustre data sets that support the narrative of the European Central Bank reaching the peak in its tightening program. The euro slid back below US$1.06 marking intraday lows at US$1.0560 before finding support. In stark contrast, US data surprised to the upside with an Employment Cost Index report printing above expectations. The divergence in US and European rates and growth expectations should continue to add support to the USD through the near term.
Our attention now turns to the Federal Open Market Committee policy update. The Fed is widely expected to leave rates on hold; thus Powell’s commentary will be key in shaping directions. We expect they will affirm the board's commitment to patience while maintaining a tightening bias.