Hawkish Powell and Potential Month-End USD Buying


US Dollar Analysis and News

  • Uber Hawkish Powell Presser
  • Market Prices in 5 Rises in 2022
  • Monthly End Rebalancing May Encourage Big USD Purchase

A very sharp press conference by President Powell, perhaps a surprise to some (it was for me), because of the recent failure we have seen in the last two weeks, in response to a tightening of financial conditions that I thought Powell would note. of, taking into account hawk disappointment. Instead, we have seen the opposite with the Fed Chair unperturbed by recent market volatility, supporting the tightening of financial conditions.

So some remarkable comments Powell made yesterday

He was very positive about the job market, saying “there is enough room to raise rates without reducing employment”

When asked about moving 50bps, the Fed Chairman responded by stating that the Fed has not made any decision on the size of rate increases. In other words, not explicitly excluding 50bps and thus money prices at 30bps worth of tension in March. However, for now, I’m still waiting for a 25bps rate.

Elsewhere, the Fed has not ruled out a rate hike at every meeting, which in turn has pushed the market to a price close to 5-rate rates this year. Very aggressive indeed, emphasizing Powell’s uber hawk press. The outlook is far from uncertain and will be affected by upcoming data, which has recently blurred. Maybe because of the effect of Omicron, but something to watch out for. As a reminder, today will see the release of initial unemployment claims, not usually a market move, but due to the considerable growth of last week (most since mid-July), it remains to be seen whether this was a one-off.

US Dollar Price Performance: Hawkish Powell and Possible Month-End USD Purchase

Source: Refinitive

Month-End Rebalanced

Today is the end of the month (two days before the end of the month), which usually refers to USD buying of corporations. Now it is always difficult to distinguish whether monthly flows are so effective on price action, but it is something to be aware of, especially in months where the stock market has seen a considerable move, similar to this month.

Month-End Rebalanced in Thero

The biggest volatile attack comes from the month-end repair, taking place on the last trade, where market extreme shifts can often occur in the lead during 15: 00-16: 00 London Time. These FX flows are derived from a mostly equity rebalancing.

As such, if a British portfolio manager holds US dollar-denominated assets and seeks hedging of FX risk, then a monthly rise in the value of those assets will lead to more dollar hedging (selling the dollar). For example, if stocks are covered by FX and US stocks (S&P 500) rose during the month while the FTSE 100 (UK stock market) traded flat, then UK based investors would sell US dollars against the Pound to add to their hedge. , leading to an appreciation in GBP / USD. The higher the yield on the US stock market over the UK would be associated with higher selling of the USD against GBP, prompting GBP to rise even higher. Although, extreme shifts can often partially return in the day after the month-end repair. That said, the occurrence of such an event in a market as liquid as FX, suggests that the London fix (especially a month-end) is important for FX traders. (GBP / USD Trading: Overview of the Pound-Dollar Forex Pair)

US Equity Equity Can Encourage a Purchase of USD

This month, the S&P 500 fell about 8%, which could prompt a significant USD buy-in at the end of the month. As shown in the chart below, months where the S&P 500 fell 3% or more (occurring 21 times since the beginning of 2010), EUR / USD tended to drift lower in the previous month to the end of the month, the largest fall occurring. at T-2 (today) before reversing losses the next.

EUR / USD Average Month-End Yield When the S&P 500 Falls 3% or More

US Dollar Price Performance: Hawkish Powell and Possible Month-End USD Purchase



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