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  • richard evans

Fed to 'skip' rate rise after softer inflation numbers

Good morning

Slightly softer than expected US inflation numbers yesterday gave the market confidence in the idea that the Fed will refrain from raising rates at this evenings FOMC rate meeting. US stocks rose and USD did weaken as a result, not dramatically but enough to send GBPUSD over 1.2600 to hit 1.2625 and EURUSD to hit 1.0825. Both slightly off those highs now, more so EURUSD which is 1.0785, GBPUSD at 1.2610 leaves GBPEUR at 1.1690.

GBP has pretty much shrugged off this mornings GDP release which came out at 0.2%, in line with expectations. Production numbers were lower than hoped but the focus on GBP right now is very much on interest rates and there is constant talk of higher peaks in rates, current rates are 4.5% and I have read some reports suggesting we may have to go as high as 5.75%, leading to the obvious panic in the mortgage markets. There will come a time when some fixed rate deals end and mortgage payers find themselves with hugely increased payments, Sunak is urging banks to help borrowers who may be struggling. BoEs Bailey has said inflation is taking a lot longer than hoped to fall, a 25bps rate rise in both July and August certainly look on the cards. Not exactly transitory, that’s for sure.

Elsewhere, USDCNY fixed at 7.1566 , the highest so far in this cycle. Back on 4th Nov 2022 it fixed 7.2555. Having surprised with a repo rate cut yesterday, there is a feeling we may get a cut in the one year MLF from its current 2.75% over the next day or two. China retail sales and industrial production numbers will be released in the early hours of tomorrow morning.

To the FOMC then. Last time around they talked about a pause in rate rises, changing this to a ‘skip’ for some reason, not quite sure what the difference is. Regardless, no rate rise is expected today although a 25bps rise is still expected in July. I do wonder with inflation coming down whether there is a risk they will be on the more dovish side and signal that their pause may last longer than one meeting, even though inflation remains at high levels. We do have the updated Fed forecasts as well, the ‘dot plot’ which shows Fed rate expectations.

For a cheap(ish) trade idea, pay 20 usd pips for an overnight 1.2650 GBPUSD call just in case perhaps? Or make it 35 usd pips for the 1.2550 1.2650 strangle, just under £3,000 per £1m notional. Difficult to imagine we won’t see either of those levels at some point.

Good luck…….

- 10.00 EU industrial production

- 13.30 US PPI

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 22.45 NZ GDP

- 00.50 Japan trade balance

- 02.00 AUS consumer inflation expectations

- 02.30 AUS unemployment

- 03.00 China industrial production, retail sales

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