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Fed holds but USD higher, now comes BoE

Good morning


So the Fed left rates unchanged as widely expected. Powell left the door open for further rate rises but for now is happy to wait for both incoming data and to determine the impact of previous tightening which the Fed feel is not yet fully factored in. None of this is a surprise, although market attention did turn to the dot plot which suggests less rate cuts through 2024 and 2025 than had previously been anticipated. Whether rates have peaked yet is still up in the air although over the last three meetings we have only seen one 25bps rise, so we know the pace of tightening has already slowed significantly. The market still thinks we may see one more 25bps rise this year and Powell didn’t really say anything to suggest this wouldn’t be the case.


The Fed also updated their GDP forecasts positively, backing up the idea that the US should see a soft landing. 2023 GDP forecast moved from 1.0% to 2.1%, 2024 from 1.1% to 1.5%, while 2025 and 2026 were unchanged at 1.8%. Inflation is not forecasts to return to 2% target until end of 2026. Fed’s thinking is 2023 3.3%, 2024 2.5%, 2025 2.2% and then 2% by end 2026. So overall, there remains a chance of another rate rise this year, but certainly less cuts next year, high rates for longer.


USD had weakened a touch through the day, GBPUSD working its way up from those post-CPI lows to 1.2420 and EURUSD up to 1.0735. On the announcement the USD pushed higher and although it then made an attempt to weaken, once Powell had spoken the USD buying resumed and we traded to a low overnight in GBPUSD of 1.2305, a new low since early April, and 1.0620 in EURUSD. USDJPY is also higher, now 148.30, despite some more attempts of verbal intervention by Japanese officials.


Elsewhere, NZ GDP came out stronger than expected overnight, with the previous reading also revised higher, leading to some players to start thinking the chances of a 25bps rate rise at the next RBNZ meeting even though they previously signalled they were done with rate rises. We did get some two way price action over the announcement but NZD is a touch stronger now, AUDNZD down to 1.0845 from 1.0915 at the end of last week. GBPNZD though is higher after that announcement, it had traded as low as 2.0715, now sits 2.0850.


It’s a day packed full of rate announcements today. We look forward to SNB (exp +25bps), BoE (exp +25bps), CBRT (exp +500bps, apologies for getting the day wrong yesterday), SARB (exp unchanged) and then BoJ in the early hours of tomorrow morning (exp unchanged). While BoJ are expected to keep rates on hold, it will be interesting to see if they make any mention of moving away from negative rates and if so whether it could be this later year.


Focussing on BoE, a 25bps rate rise is still favoured although the drop inflation has made some players question whether this is the right move. CITI for example think BoE will leave rates on hold this time, although make it clear that rates have probably not yet peaked. UBS on the other hand still look for a 25bps rise today. I wonder whether their decision will, in part, be led by the level of GBP. While the level of GBP may not be the BoEs mandate but all things considered I’d imagine they’d rather see a stable currency. Don’t forget UK retail sales follow early tomorrow morning.


Thanks to those who wrote in about the wrong Turkish date yesterday. Worry not, I am never offended if you highlight something incorrect or even if you disagree with something I have written. It shows that you read it, that my time spent at the keyboard is not wasted and if my daily musings engender some discussion and contact that we wouldn’t have otherwise, then I see that as a good thing. Regardless, comments from yesterday about CBRT decision apply today.


In other news, Sunak yesterday confirmed the ban on sales of new petrol and diesel cars will be pushed back by five years to 2035. No great surprise, I know everyone wants electric cars but it does seem clear that if we all converted now there would not be enough capacity in the grid to charge that many vehicles. It is still possible that we eventually see a different technology powering our cars. I did see another prototype hydrogen car on offer recently, hydrogen cars release zero emissions and save us from having to mine vast amounts of lithium but they are a long way from becoming mainstream. In the long run I guess it will depend on whether we crack nuclear fusion or something similar, or even whether we find a better way of harnessing power from the sun, wind and tides. For now, electric cars are here to stay, while petrol and diesel cars are here to stay a little longer than they were this time yesterday.

As I type SNB have surprised the market by keeping rates unchanged when a 25bps rise had been widely expected. EURCHF has moved from 0.9565 to 0.9645 in a straight line. Does this make a BoE hold any more likely?


- 08.30 SNB rate announcement

- 12.00 BoE rate announcement

- 12.00 CBRT rate announcement

- 13.30 US initial jobless claims, philly fed survey

- 14.00 SARB rate announcement

- 15.00 US existing home sales

- 15.00 EU consumer confidence

- 23.45 NZ trade balance

- 00.00 AUS S&P manufacturing, services PMI

- 00.01 UK GfK consumer confidence

- 00.30 Japan CPI

- BoJ rate announcement

- 07.00 UK retail sales



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