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  • richard evans

Fed raise rates 75bps but dovish comments send USD lower

Good morning

We had to wait until after the London close for the excitement, which came in the form of the FOMC. They raised rates 75bps in a unanimous decision, as widely expected, everything was pretty much unchanged until Powell spoke at the press conference. His comments were regarded as slightly dovish, which was enough to send USD lower. He did note the ongoing risk of inflation and the importance of dealing with that early, a 75bps rise in September isn’t ruled out and he doesn’t see US as being in recession.

However his comments that Fed is now in range of neutral and that the US economy is showing signs of slowing was enough for many to pull back some rate rise expectations, which sent USD lower and equities higher. Rate moves now will be highly data dependent and very much on a case by case basis. US GDP this afternoon expected at 0.4% but I have seen some reports this morning looking for a lower reading, perhaps even negative for the second consecutive quarter. Two negative quarters would be enough to trigger the official determination of a recession although I know the White House are keen to point out they do not regard US as being in recession. A negative reading is likely to put further pressure on USD.

However with US CPI still running at over 9% the Fed won’t be stopping their rate rise cycle but the pace of rate rises could well slow. Only 1% more rises are priced in for this year, perhaps 50bps in Sept and then 25bps each in Nov and Dec, and that could be the peak, with many looking for rate cuts into 2023. There is a chance though that the Fed have to do more so a weak dollar is not necessarily here to stay.

EURUSD traded from low 1.01s up to 1.0220, currently 1.0210, GBPUSD moved from 1.2030 up to 1.2180, now just a few points off those highs, but a key beneficiary was gold which traded from a low in the afternoon of 1712 or so up to 1740 and this morning has built on those gains to trade near 1745.

Biden should be speaking with China’s Xi today. Tariff removal may be on the agenda but the key will be the ongoing tensions over Taiwan, Pelosi’s potential visit in the coming weeks and China’s talk of retaliation if she were to go. A real fear this could be the catalyst for China to impose its will through military means. Not only that but there are reports North Korea’s Kim has said he is ready to mobilise forces, we’ve not heard much from him recently so not sure why he’s making noises now. The UKs national security adviser has said the world was safer during the cold war.

Aussie retail sales disappointed overnight although AUDUSD has held ion the high 0.69s, having traded above 0.7000 for the first time since mid-June after FOMC. AUDNZD at 1.1140, GBPAUD currently just at 1.7400.

- 10.00 EU confidence data

- 13.00 German CPI, HICP

- 13.30 US GDP, core PCE, initial jobless claims

- 00.30 Japan Tokyo CPI, unemployment

- 00.50 Japan retail trade, industrial production, BoJ summary of opinions

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