Perfect Pause, Sixth Time!
Fed held rates steady for the sixth straight time and acknowledged a "lack of further progress" on cooling inflation. While clearly more hawkish than he was last meeting, a net dovish tint to Powell’s words can't be missed. Markets seem to believe that he might have seen the payroll number, and the weakness could have been the reason for the inexplicable dovish undertone.
Fed announced that starting in June, it will "slow the pace of decline of its securities holdings" to a maximum of $25 billion in Treasurys per month. (Since June 2022, the Fed has been allowing up to $60 billions of Treasurys a month run off its balance sheet. It has also let $35 billion in MBS to mature each month without reinvesting the proceeds, which it will continue doing.
(Fed has by now educed the size of its balance sheet by 17% since mid 2022. Still, at around $7.4 trillion, it remains double what it was before Pandemic)
If worried about inflation above target, why slow down tightening by reducing the runoff from Fed’s portfolio? Seems like a compromise - If the late-day performance and market reaction appear confusing, it might be indeed appropriate, given lack of clarity in Fed's outlook & Powell's signals.
Most of Europe was closed for Labour Day.
Friday’s Payroll will drive momentum to close out the trading week - for now Plunge lower in USD/JPY on suspected intervention helps EUR.1.0650 1 0730 consolidation.
GBPUSD caught between 10-and 200 dmas 1.2464-1.2552.
Based on calculations from BoJ's current account balances and the net drain of yen funds as FX operations were settled., there is certainly ¥ 5.5 trillion intervention (USD 34 bio) on Monday.
Rapid 157.58-153.00 post-Fed move at NY close/ Wellington open - the timing is curious - fingers point to BOJ who seems to be engaging in a Guerilla war with markets. Outlook for yield differentials post FOMC not changed - they will remain wide for longer - hence macro positive setup - resistance 156.62, 50% of this week's fall.
Guess 83.50 plus close this week should see 83.77 tested and broken next week.