Dollar holds gains after hawkish Fed comments
The dollar held most gains against basket of currencies on Thursday after hawkish comments from the U.S. Federal Reserve led markets to move forward the likely timing of a policy tightening.
The euro ticked higher at $1.1848, having recoiled from a top of $1.1899 overnight after failing to crack resistance around $1.1910. The dollar also reached 109.75 yen, from a trough of 108.71 on Wednesday, negating what had been a bearish break to the downside.
On Wednesday, Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023.
He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on the labour market over the next few months.
“Clarida’s comments are allowing the dollar to stay well supported into the payrolls numbers on Friday,” said ING FX strategists Francesco Pesole and Chris Turner.
“For today, the dollar could merely find some stabilisation amid a fairly quiet U.S. calendar (focus will only be on jobless claims).”
Predicting the jobs report with any confidence remains tricky as the spread of the Delta variant and labour bottlenecks roil the market.
Thus, the median forecast for payrolls is 870,000 while the range of estimates stretches from 350,000 to 1.6 million.
Mixed data on Wednesday added to the uncertainty as a surprisingly weak ADP report on private hiring clashed with the strongest reading yet for U.S. services.
Clarida’s comments led investors to price in slightly higher chances of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose.
Such a move would likely precede any tightening by the European Central Bank, which is battling to get inflation near its target.
In contrast, the Bank of England is nearer to tapering and could expand on timing at a policy meeting later on Thursday.
That outlook helped the pound rally early in the year, although it has traded largely sideways over the last couple of months. It was last pinned near support at $1.3884, having repeatedly failed to clear resistance above $1.3980.
All these central banks are laggards compared with the Reserve Bank of New Zealand (RBNZ), which seems likely to hike rates at its next policy meeting on Aug. 18, making it the first in the developed world to move since the pandemic hit.
A super-strong jobs report on Wednesday added to the case for New Zealand tightening and sent the kiwi to a one-month peak of $0.7088 overnight, before steadying at $0.7041.
“NZ’s economy has almost closed its output gap and will risk overheating if stimulus is not reduced,” said Westpac’s head of NZ strategy Imre Speizer. “Markets are fully pricing a 25 bps rate hike, and are flirting with some chance of 50 bps.”
He recommended buying the kiwi on any pullback to $0.7005, for a target of $0.7300.