Good morning

FOMC raise rates 75bps to 1.75%, the largest single increase since Nov 1994, and signalled another 75bps could be on the cards when they meet next month as well. Powell did add that 75bps should not be regarded as common. There was one dissenter, George voted for a 50bps rise which is a little odd given she is usually one of the more hawkish members. The dot plot showed rate expectations up to 3.4% for 2022 and 3.8% for 2023, large increases over the previous forecasts of 1.9% and 2.8% respectively. Inflation forecasts were also a touch higher at 4.3% for 2022 and 2.7% for 2023.

The initial move saw USD trade higher, with EURUSD down to 1.0360 and GBPUSD to 1.2030. Over the press conference however those moves were reversed and EURUSD traded up to 1.0460, GBPUSD all the way to 1.2200. As I type those moves have again reversed, EURUSD back to 1.0390 and GBPUSD to 1.2065. GBP still stronger against EUR than it was yesterday although as taken a little leg lower this morning to 0.8610 (GBPEUR 1.1615).

ECB meeting ended up offering less support to EUR than was hoped, EURUSD falling from a peak of 1.0505 to 1.0430 yesterday. Plenty of talk about widening bond spread between the likes of Germany and Italy, and I presume they will help at some point. The problem, at least in part, is what drives the spread wider, and whether the ECB could or should act. Political uncertainty in a country, for example if Draghi resigned in Italy, could widen the spread but ECB may choose not to help in that instance. The ECB do seem committed to an ‘anti-fragmentation tool’ but exactly when it arrives and what it really looks like remains to be seen.

US stocks ended positively post-FOMC and most Asian markets were also higher, although China stocks moved lower as Shanghai ordered mass-testing for Covid every weekend through to end of July with lockdowns possible if any positive cases are found.

NZ GDP came in a lot lower than expected overnight while Aussie employment numbers came in stronger than expected which helped push AUDNZD to the mid 1.11s, and AUDUSD to 0.7035 although the latter has since slumped to 0.6965 on the stronger USD this morning. Hawkish talk from RBAs Lowe recently has led to some banks raising rate forecasts, now seeing 50bps rise in both July and August.

I’ve seen a couple of big banks looking at downside USDJPY trades, the thinking is that we’ll see BoJ intervening at some point, maybe just verbally or maybe with some actual action. We reached 135.60 recently, highs overnight though were 134.65. BoJ rate announcement in the early hours of tomorrow morning. Some thinking there will be talk about yen buying plans, particularly if USDJPY were to trade higher to say 140.00.

As I type SNB have raised rates by 50bps to -0.25% sending EURCHF sharply lower from 1.0380 to 1.0170. There had been a bit of speculation that SNB may rise by perhaps 25bps but as the resulting move suggests, the market was completely unprepared for this.

BoE rate announcement today where a 25bps rise is widely expected, a couple of members likely to vote for a 50bps rise. I’m surprised there hasn’t been more talk of this, given the high rate of inflation and seeing other central banks making larger than expected rate rises. I’ve said before though that BoE have the difficult job of balancing growing inflation and a weak economic outlook, one reason why GBP is under so much pressure. A 25bps rise is gentle and probably unlikely to offer any support to GBP, a surprise 50bps rise should see GBP initially higher but I wouldn’t be surprised if it then fell as the state of the overall economy comes back into focus.

I’m out of the office tomorrow so I’ve added in tomorrows calendar, very interested to hear what Powell has to say. Still got to get through today mind you……

- 09.30 ECBs de Guindos speaks

- 12.00 BoE rate announcement

- 13.30 US initial jobless claims, housing starts, building permits, philly fed

- 23.30 NZ business PMI

- Friday

- 04.00 BoJ rate announcement

- 07.00 BoJ press conference

- 09.30 BoEs Pill, Tenreyro speak

- 10.00 EU CPI, HICP

- 13.45 Feds Powell speaks

- 14.15 US industrial production

- 16.00 Fed monetary policy report

- 20.30 CFTC position data

  • richard evans

Good morning

US dollar continued to push higher yesterday, GBP was by far the biggest loser, trading down to below 1.2000 to 1.1935 at one point, levels not seen since March 2020 when Covid lockdowns were announced. It recovered slightly overnight to 1.2040 but now sits 1.2020. EURUSD was also lower but just managed to hold above 1.0400, but a move back up to 1.0480 this morning means EURGBP is at 0.8720 (GBPEUR 1.1470), matching the lows for GBP back to April 2021.

What led to EUR rally? Perhaps it was ECBs Schnabels comments that ECB will help the more vulnerable EU nations who face soaring borrowing costs that has helped EUR. Lagarde speaks later today, see if she gives any clues as to size of move expected next month.

EUR really buoyed by reports of an ad-hoc ECB meeting that is due to take place today where they will discuss the recent rout in the bo9nd market and perhaps look at steps to limit talk of fragmentation and deal with bond spreads between Germany and some of the more indebted nations. I believe the meeting is 10.00am london time, but not sure what time we should expect to see some news from that.

China numbers overnight were better than expected, even the drop in retail sales wasn’t as bad as had been forecast. Still some talk of US removing tariffs on China products, more in an attempt to ease inflation rather than to help China trade.

USDJPY traded up to 135.50 overnight, surpassing the Jan/Feb 2002 highs, indeed I believe we go all the way back to October 1998 to see levels higher than that. It has fallen back to 134.65 but with limited verbal intervention from Japan and FOMC announcement pending, another push to the upside looks more than possible.

FOMC rate announcement later today, we wait to see whether Fed raise rates 50, 75 or 100bps. For me 75bps seems to be the favourite for now given the higher US inflation numbers released last week. We will also get updated economic forecasts from the Fed, including the ‘dot plot’ which is likely to indicate much higher rates through the next couple of years than was suggested last time round.

Incredible innings from Jonny Bairstow in the cricket test match against NZ yesterday which saw him so close to breaking the fastest test century ever by an England batsman. His innings helped England secure victory. Shame the England footballers couldn’t follow suit. A dismal display saw them lose 4-0 to Hungary, I’m sure I read that this is the worst home defeat for 94 years.

- 10.00 ECB ad-hoc meeting

- 10.00 EU industrial production, trade balance

- 13.15 CAD housing starts

- 13.30 US retail sales, import/export prices

- 14.15 ECBs Panetta speaks

- 15.00 US business inventories

- 17.20 ECBs Lagarde speaks

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 23.45 NZ GDP

- 00.50 Jap[an trade balance

- 02.00 AUS consumer inflation expectations

- 02.30 AUD unemployment

Good morning

The US dollar was stronger yet again yesterday as the market continues to look at the potential for more aggressive rate rises by FOMC, starting with a possible 75bps rise tomorrow. Goldmans, JPMorgan, Deutsche Bank, Barclays all see a 75bps rise coming. If this were to happen it would be the first time since Nov 1994 they have raised rates by that amount in one go. A total 2% of increases is now seen from the next three FOMC meetings, even a rise of 1% tomorrow cannot be ruled out. US stocks shift lower, the S&P 500 was down nearly 4% yesterday and although futures pricing points to a slight recovery, this looks like real bear market territory.

GBP was one of the worst performers, hampered not only by the strong dollar but also by the unilateral dumping of part of the NI protocol which has seen EU talk of legal action and possibly trade tariffs. This morning saw disappointing UK unemployment numbers, showing an unexpected rise in the unemployment rate, on the heels of weaker than expected data yesterday morning. The recent weak data is a real headache for BoE who need to raise rates as inflation rises, but against a weaker economic background. Doesn’t sound good. GBPUSD traded to 1.2010 yesterday but managed to creep back up to near 1.2200 before the data this morning, which took the pair back to 1.2160.

EUR was also lower against the USD, trading below 1.0400 overnight before staging a slight recovery to mid-1.04s, unmoved by German inflation numbers this morning that came out in line with expectations. EURGBP up at 0.8585 (GBPEUR 1.1650), an area that has been tested and held several time since last October, give or take the odd blip. Its quite a significant level.

UDJPY traded down to 133.60 yesterday afternoon before heading back to 134.80 early this morning, Japan officials seem to be quiet this morning. Bitcoin traded below $21,000, with $20,000 looking like a key psychological level, a break of which open s up a move back below $10,000. Quite some way from the $100 level Goldmans had been talking about at the start of the year. Can’t be right all the time. Spare a thought for the people of El Salvador who announced the digital currency as legal tender back in September, the value of Bitcoin has pretty much halved since then.

Gold also trades lower, spiking down to $1810 overnight in a move that looked more than a little like stop-hunting. Now back up to $1825, seems to be torn between a strong dollar and demand for a hedge against inflation.

I have been reading with some interest that a Google engineer has been placed on paid leave after sharing a conversation he had with an AI system, Lamda, that, he claims, shows the AI has its own feelings. Google have dismissed the claims but look set to also dismiss the engineer. AI is certainly something that we’ll read more about in our lifetime. Forget the ‘chatbot’ idea that just picks up on key words, these really seem to be able to hold a proper conversation. I still struggle with the concept, I still see anything computer based as something that has to be programmed, but I have no doubt there are developments that will one day blow our minds. Anyone remember WOPR or Johnny 5?

- 10.00 German ZEW

- 13.30 US PPI

- 13.30 CAD manufacturing sales

- 18.00 ECBs Schnabel speaks

- 23.45 NZ current account

- 00.50 Japan machine orders

- 01.30 AUS Westpac consumer confidence

- 03.00 China retail sales, industrial production