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  • richard evans

Fed pauses, ECB to raise rates 25bps today. Watch Yen.

Good morning

Fed left rates on hold as they had suggested at their last meeting, but at the moment further rate rises are expected and a rise in July looks more than likely. The ‘dot plot’ suggests most members think rates can go to 5.5% or above, some 50bps higher than previous estimates, although there are a couple who don’t see the need for any further rate rises. The chances of rates cuts into late 2023 have diminished. As you know I did wonder whether Fed would turn a little bit dovish, indeed Powell did say that the effects of previous tightening remains uncertain and that it makes more sense to go slower with rate rises now. July is certainly a ‘live’ meeting but I’m not convinced yet that we’ll see a rise. Mind you, inflation is still high and Fed made it clear their aim is to get inflation to 2% over time.

In terms of currency moves, USD had weakened going into the meeting, with GBPUSD up around 1.2700 and EURUSD at 1.0865, although those losses were reversed quickly with EURUSD trading back to 1.0800 and GBPUSD to 1.2630. USD has made solid gains against yen, USDJPY now up to 141.45 which brings GBPJPY to 179.00 and EURJPY to 153.00. The moves prompted some talk from Japanese officials with FinMin Matsuno saying excessive moves are undesirable but so far there is no sign of intervention.

ECB meeting today where a 25bps rise is widely expected which would take rates to 4.0%. This is pretty much priced in, the key really is what path rates talk in the coming months, particularly given the most recent inflation numbers were on the weaker side.

China cuts its one year MLF rate by 10bps to 2.65% sending Chinese stocks higher. I had mentioned this move may be on the cards but it still seemed to take the market by a bit of a surprise. USDCNY fixed slightly lower at 7.1489. Don’t get too excited about the news US SecState Blinken is to visit China this week. He is the most senior official to visit in five years but both sides are playing down any expectations of a major breakthrough in their tense relationship. Still, talking is better than not talking.

Aussie employment numbers were very strong, giving AUD a bit of a life with GBPAUD now 1.8560 having traded up to 1.8680 before the announcement. Aussie consumer inflation expectations were also higher than expected at 5.2%, expected 4.8%. Another rise from the RBA next month is likely.

A lot of focus on UK mortgages at the moment, the Telegraph runs an article saying this is the worst crisis since the 1980s with rising interest rates and huge borrowings given the high house prices.

US retail sales due out today. With the Fed watching incoming data closely, market impact of the major US economic releases could be more exaggerated than we have seen in recent weeks and months. We will also have the BoJ rate announcement overnight. I had been thinking the BoJ may look to signal some very slight tightening at some point but with Yen where it is, the market clearly isn’t expecting this today. Don’t even think its worth looking for a cheap trade just in case.

The US Open golf tournament begins today. I don’t know the Los Angeles Country Club course where the event is being held but it does sound a bit quirky. There are five par threes which is unusual, the 7th and 11th holes are 284 and 290 yard par threes. This really highlights the difference between the professional and the regular social golfer that most of us are, where a drive of 250 yards is really considered very good indeed.

There is also a 124 yard par three but can play more like 80 yards if the hole is near the front of the green. Don’t be fooled, that doesn’t make it easy. I read that Ricky Fowler suggested he’d lay up if the pin were at the front. Laying up on an 80 yard par three? My mates would never let me forget that if I ever did it. Guess that’s why I’m here at my desk and Fowler is enjoying the California sunshine…..

- 13.15 ECB rate announcement

- 13.30 US retail sales, philly fed survey, initial jobless claims

- 13.45 ECB press conference

- 16.35 BoEs Cunliffe speaks

- 23.30 NZ business PMI

- BoJ rate announcement

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