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
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