Wednesday, 8 February 2023
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•          After Minneapolis Fed’s Kashkari, who sided with his colleague Bostic in calling for a higher terminal rate than the dots currently suggest if labour market strength persists, all eyes turned to chair Powell. The Fed chair stuck to the point made at the FOMC meeting last week in the first part (probably more rate hikes needed, disinflationary process has started but with a long and bumpy road ahead), seemingly ignoring the blow-out payrolls report and strong ISM services rebound at first. That caused an intraday retreat in both US yields and the dollar only to recover again after Powell eventually did mention the possibility of higher-than-currently-envisaged policy rates in case labor market continues to surprise to the upside. It didn’t alter market expectations for a 5-5.25% peak rate though, leaving the front end of the US yield curve largely unchanged to slightly lower, even as a $40bn 3y auction went a bit rocky. Yields rose 3.4-3.8 bps in the 10-30y bucket. German yields finished 2.4 bps (30y) to 8.5 (2) higher, solely thanks to a surge in the final 15 minutes of the trading session. We didn’t find any particular trigger as both ECB’s Schabel (summoning her well-known inner hawk) and Fed’s Powell were scheduled to speak only after the European bond market close. The dollar nor the euro was able to profit even with the continued uptick in yields. Both lost out against their G10 peers. The EUR/USD pair itself experienced some two-way Powell-induced volatility but finished the day eventually unchanged at 1.072, below the 1.0735 support. Sterling rose slightly. EUR/GBP revisited support at around 0.89. The Japanese yen together with the Aussie dollar (thank you, RBA) stood out. USD/JPY fell from 132.66 to 131.07. AUD/USD rose from 0.688 to around 0.696 and continues on that pad this morning against a US counterpart that’s trading slightly in the defensive during a quiet Asian session. News stories revolve around US president Biden’s State of the Union in which he vowed not to default over the debt limit. UST yields decline modestly (1-3 bps).
•          The economic calendar doesn’t have a lot to offer today. There are again a few speeches scheduled from Fed policymakers (Williams, Cook, Waller and others). We expect them in general to support the case for a higher peak policy rate, conditional on persistent above-expectations economic strength. It probably won’t boost (US) yields the way we’ve seen over the past few days but it should at least protect their downside. The $35bn 10-y auction is definitely worth following up. The strong US dollar run since Friday lost some momentum yesterday with a doji-reversal-pattern having emerged in EUR/USD. The pair is also hovering near the lower bound of the upward sloping trend channel. A break lower would be a constructive technical signal for the greenback but we don’t spot any triggers for such a move, at least not today. In the UK, investor attention is slowly turning to the Q4 GDP release due on Friday.

News Headlines

•          The Reserve Bank of India (RBI) slowed down the pace of rate hike cycle as expected to 25 bps, bringing the policy rate at 6.5%. It also decided to stick to guidance relating to the removal of policy accommodation rather than shifting to more neutral. Adjusted for inflation (Jan CPI: 5.72% Y/Y vs 4% RBI target), the policy rate still trails its pre-pandemic levels. This suggests more tightening ahead. RBI governor Das warned to remain vigilant on inflation in the press conference afterwards. A further calibration of monetary policy is warranted to keep inflation expectations anchored, break the persistence of core inflation and thereby strengthen the medium term growth prospects. New GDP forecasts for fiscal year 2024 show a slowdown to 6.4% from 7% in the current fiscal year with risks stemming from geopolitics and tighter global financial conditions. The Indian Rupee didn’t react and at USD/INR 82.70 remains near all-time low levels (83.30).
•          Polish Parliament is expected to vote today on a legislative proposal which it hopes will end the stalemate with the EU and trigger the release of €36bn in grants and loans from the EU’s pandemic recovery fund. The EU holds back the money as some judiciary reforms threaten the independence and impartiality of judges. Under the new proposal, the controversial regime for disciplining judges is moved from the Supreme Court to the Supreme Court of Administration. It’s unclear whether this is sufficient for the EU. Poland’s EU affairs minister yesterday said that “optimistically speaking, the EU money could arrive this summer”.


The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially failed to push the 10-y Bund towards the cycle top just north of 2.50%. A strong batch of (US) eco data later served as a global wake-up call. Support at 1.96% survived with a follow-up countermove. We stick to our view that the depo rate will peak at >=3.50%, implying yields have further room to run.

The December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. US yields rebounded, but markets doubt this guidance as recessionary fears linger. The February policy meeting (+25 bps) again failed to convince them but a stellar January jobs report did the trick. Support between 3.32% and 3.4% survived. The 10y yield instead is now focused at the 3.50/63% resistance area.

The dollar lost momentum in Q4 as US inflation started topping out. EUR/USD leaving a downtrend channel improved the technical picture with the euro receiving support from the ECB’s hawkish twist, lower energy prices and a bullish risk sentiment at the start of 2023. The pair tested 1.10 on the Fed/ECB combo. A break failed with the dollar instead gaining momentum post-payrolls.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …) EUR/GBP is breaking through the high 0.88 resistance (recent highs) zone. There’s little in the way technically towards 0.92.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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