Currency Point: The beginning of the curbs

For the first time in the post-COIVD world the US will increase the Federal Funds rate. The FX world has known this for several months now and so there will be no surprises when it happens.

What will be watch at the Fed’s March press conference this week is how high it expects inflation to go – and how much on an impact on growth the current environment might have.

Last week saw the US print another 40-year record in CPI – with the February inflation read coming in at 7.9 per cent year on year up 0.8 per cent month on month. And, remember this doesn’t include the price rises in fuel from the Russian-Ukrainian war which has seen US petrol prices at over US$5.50 a gallon (this is the equivalent of around A$3.18 a litre in). Even when you strip out the volatile items of food and fuel US core CPI was up 6.4 per cent year on year and 0.5 per cent month on month also 40-year records.

The US now is 440 basis points above its stated inflation goal of 2 per cent, and all pretext of ‘transitory’ pressures is gone which is why the market continues to question the speed and size of the Fed’s rate hike path to bring this under control.

However, the Eastern Europe conflict and the incredible rise in oil price may give the Board some ‘room’ to excuse itself not going harder. The big concern would be crashing the economy through higher prices and higher rates. It going to be an interesting tightrope.

Looking to FX and again the EUR remains under pressure despite a more hawkish tone from the ECB last week. EUR/USD fell from $1.105010 to $1.0980 a new 2 year low before recovering to be back in the $1.10 handle. But its against commodity led currencies that it is suffering the most

EUR/AUD has gone from $1.621 at the start of February to $1.459 – it has recovered some of this fall on the hawkish ECB but at $1.497 it is still its weakest read since August 2017.

EUR/CAD is even worst having fallen from $1.60 to $1.376 its lowest read since June 2015 and even with its 3 cent recovery to $1.405 we still have to go back to April 2017 to see it at this level.

It will be interesting to see how USD positions move this week – there is a lot of information to take in. It is why we are looking to the post-Fed environment to assess the options.