This week, there is an evident divergence in the relative hawkishness of G10 central banks. While the Fed stepping down from a 75bp hiking pace to 50bp in December is wholly consistent with its projections, underwhelming survey data point to a faster-than-expected slowing in activity. A heavy calendar of Fed speakers next week – Williams on Nov. 28 and Powell on Nov. 30 are the highlights – should remain hawkish, trumpeting the Fed’s inflation-fighting credentials.
I would expect FX Traders to Fade any USD strength on these speeches, though, with the market consensus bias to believe that US headline inflation will continue to ease substantially over the next month or two and that the tail risks around plus 5% terminal rate expectations have dropped sharply. After all, a step down to 50bp in December would be an unambiguous signal that peak hawkishness has passed.
By contrast, the RBNZ’s discussion of a 100bp increase during its hike to 75bp this week is a hawkish step up. Meanwhile, the ECB’s emphasis remains on current inflation rather than the forward-looking ability of weaker activity reducing price pressures after Executive Board member Isabel Schnabel said that “the room for slowing down the pace of interest rate adjustments remains limited.” Schnabel’s hawkish record notwithstanding, the market can not rule out a 75bp rate hike in December, giving EURUSD upside further scope to run.
A more attractive global ex-US growth setup heavily depends on expectations around China’s reopening. Fading concerns around renewed restrictions would give opportunities to sell USD into year-end, with China-sensitive currencies – AUD, CNH, KRW and THB – standing out.