Citi

The greenback has been unable to renew its gains, after Fed Chair Powell slightly played down tapering expectations. He acknowledged that the US CPI print earlier in the week was “tied to a small group” of items while China real economy data overnight was stronger than expected – June retail sales and industrial production data beat expectations while Q2 GDP is solid. This means that key levels vs the USD are holding for now – 1.1775 for EURUSD and 14.70-15.00 in USDZAR to name a few.

Central banks continue to be the main focus, with KRW outperformance overnight due to a hawkish BoK, in spite of the Covid situation. Assuming 2-3 weeks of strict measures in greater Seoul area, Citi Economics has brought forward our first hike call to August from October this year. CLP saw a 25bps rate hike as expected, while we see ILS inflation later today to add to broader conversations. Jobs data was less of a market mover for GBP and AUD also.

USD:USD has taken pause, in part due to dovish comments from Powell. My colleague Xhoel Veizi provides a recap:

–The Fed Chair acknowledged the latest spike in US CPI was “tied to a small group” of items. Citi Economics flagged spikes in airfares, hotels, and other components affected by supply-constraint issues, like auto prices. Meanwhile, ‘stickier’ measures like OER proved more stoic.

– “If inflation expectations move up in a way that is troubling - materially above and for an extended period - we would respond to that.” Powell alluded to a sustained rise over 2% as being a signpost for worrisome price pressures. The Fed’s Common Inflation Expectations Index breached the 2.0% mark earlier in Q1. Nonetheless, it will take time for the ‘transitory’ vs. sticky’ inflation debate to decisively lean any particular direction.

– “While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue.” Progress alludes to national job gains. Recent NFP figures have been underscoring an improved trend; however, limited labor participation has capped more meaningful increases. The upcoming fall season will offer a better litmus test for labor markets given the end of enhanced Federal benefits (September), and other factors. Taper talk should become more frequent in the interim.

Westpac

Fed Chair Powell understandably remains reluctant to indulge in taper talk while surging inflation is seen as a temporary reopening story and until substantial progress on the labour market has been achieved. But regardless, USD atmospherics have changed materially for the better. Until recently, the Fed maintained a near-united front on open ended asset purchases and a “commitment” to keep rates unchanged through at least end[1]2023. But now, tapering is seen as a foregone conclusion this year. Even more moderate and at times very dovish FOMC members such as Daly and Bullard are openly advocating for a slowing of asset purchases. The Fed’s dot plot “guidance” signals 2 hikes in 2023 and there’s a non-negligible chance the 2022 dots could shift at their September meeting to show a median preference for lift-off next year. In the space of barely a few weeks the Fed has become more of a tailwind for the USD, a marked shift from the persistent underlying drag that it was prior to the Fed’s June pivot.