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Market Comment – Dollar rises as Fed enters spotlight, yen plummets



  • US dollar gains as traders brace for hawkish Fed

  • Yen tumbles despite BoJ’s historic decision

  • Loonie slides on cooler than expected Canadian inflation

  • Wall Street gains ahead of Fed, oil extends advance

Will the Fed revise its dot plot higher?

The US dollar traded higher against its major counterparts yesterday, gaining the most versus the yen, the kiwi and the loonie in that order. The greenback continued trading on the front foot today as well.

The buying of the dollar suggests that investors are likely expecting a hawkish outcome from today’s FOMC decision, and this is evident by the fact that they continued pushing back their rate-cut bets. According to Fed funds futures, they are now penciling in a 68% chance for a 25bps reduction in June, with the total number of basis points worth of cuts anticipated by the end of the year dropping to 75, in line with the Fed’s December dot plot.

Taking that into account, the Fed’s updated interest rate projections may be of major importance today. With the US economy faring better than most of its major peers and inflation proving to be stickier than expected, there has been speculation that the dot plot may be revised up to indicate two quarter-point rate cuts by the end of the year. Such a decision would provide room for further upside adjustment to the market’s own implied path and thereby add more fuel to the dollar’s engines.

Yen falls after BoJ; will the intervention alarm bells ring?

The yen was the main loser, tumbling more than 1.5%, even after the BoJ’s historic decision to end eight years of negative interest rates and entirely abolish its yield curve control policy.

With reports already preparing investors that policymakers may decide to press the hike button at this gathering, the decision came as no surprise, while the Bank’s announcement that they will continue government bond purchases with broadly the same amounts as before makes the abandonment of yield curve control not such a material change.

Combined with Governor Ueda’s remarks that they will maintain accommodative monetary policy conditions, the meeting’s decisions did not add any extra hawkishness to the market’s own perception. Investors continued to believe that any subsequent rate increases are likely to be very gradual and slow as several members have telegraphed ahead of the meeting, assigning around an 83% chance for the next 10bps hike to be delivered in September.

For the yen to change course and begin a long-lasting recovery, data and headlines may need to start suggesting that another rate increase may be appropriate sooner than the market expects. Otherwise, further declines may trigger another round of verbal intervention by Japanese officials.

Loonie falls after CPI data, pound awaits BoE

The Canadian dollar was also among the major losers, getting knocked down after the Canadian CPIs for February came in lower than expected, prompting investors to add to their BoC rate cut bets. From 20%, the probability of a 25bps reduction at the Bank’s upcoming decision has risen to around 25%, while the total number of basis points worth of cuts expected by December has increased to around 75 from 65.

Today, it was the UK’s turn to release inflation numbers, with both the headline and core CPI rates for February coming in lower than anticipated. However, the pound barely reacted to the data, perhaps as traders preferred to avoid large positions ahead of tomorrow’s BoE decision.

Wall Street in the green, oil extends rally on supply concerns

On Wall Street, all three of its main indices closed in the green, with the Dow Jones gaining the most ground. The chip-making giant Nvidia erased early losses to close 1% up after it revealed details of its highly anticipated Blackwell B200 artificial intelligence chip that could be 30 times faster than previous chips.

Although equities could pull back if the Fed appears hawkish today, prompting investors to further push back their rate cut bets, the Nvidia story suggests that AI-related future growth opportunities are not fully factored into the market. Thus, any Fed-associated declines may be seen as a corrective phase, providing renewed buying opportunities.

Oil prices extended their gains on Tuesday as supply concerns remained elevated due to attacks by Ukraine on Russian refinery facilities. Even if this proves to be a temporary event, oil prices may continue to gather support from declining exports from Saudi Arabia and Iraq, as well as signs of improving demand and economic growth in the US and China.


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