Market awaits FOMC rate decision
Overall yesterday was another quiet day, with one exception. The Euro fell sharply, initially it looked as though it was just another USD push higher but we see the Euro has weakened more significantly than other currencies. At this time yesterday, EURUSD was at 1.0230 and GBPUSD 1.2040 or so. At one point yesterday EURUSD reached 1.0110, GBPUSD 1.1965. Now GBPUSD is back up to 1.2050 while EURUSD is still down at 1.0140. This obviously means GBP is higher against the Euro, EURGBP at 0.8415 (GBPEUR 1.1885), this is quite a big level having tested around here a few times since May.
The potential for a recession in the Eurozone seems to be a catalyst for the move although quite why Euro would be affected any more than GBP is a little surprising, given IMF has previously said UK will have slowest growth of all G7 nations into 2023. IMF have lowered global growth forecasts to 3.2% in 2022, down from 3.6% back in April. ECBs de Cos said risks to inflation have intensified suggesting more rate rises are on the way although perhaps that talk of recession has meant some players are already lowering their ECB rate forecasts, Goldmans for example now see a 25bps rise in October, down from 50bps. S&P revising Italy outlook down to stable from positive won’t have helped I’m sure.
Aussie CPI was almost in line with expectations although a miss in the headline at 6.1% against 6.2% expected saw AUD fall, dropping 40 pips against USD from 0.6950 to 0.6910 and from 1.1135 to 1.1095 against NZD, the latter actually now back to pre-release levels. GBPAUD had been down at 1.7325 and actually traded to 1.7415, now at 1.7385 has held a good proportion of those gains. This slight dip could see RBA raising rates just 50bps next week rather than 75bps, perhaps this depends on the scale of the Fed rate move later today.
Biden is due to talk with China President Xi Thursday, that will be difficult as both sides attempt to assert their own thinking over the Taiwan situation. As you know I do feel China will, at some point, decide enough is enough and we’ll see some sort of military action. Lets hope I’m wrong. The potential for US to remove some trade tariffs could smooth the talks. Meanwhile nearly one million Chinese citizens are put on lockdown in Wuhans Jiangxia district over Covid infections.
Key today will be the FOMC rate announcement this evening. A 75bps rate rise is expected, there had been some thinking they may choose to go with a smaller 50bps rise, although IMF have urged central banks to resist the urge to back off the fight against inflation. We know Fed are looking to front load rate rises, I do think another 75bps rise is most likely but both 50bps or a larger 100bps rise are both possible although recent comments from Fed officials have been a little more dovish recently, making a 1% move less likely.
Just a word of congratulations to the England ladies football team who booked themselves a place in the Euro 2022 final with a comprehensive victory over Sweden in the semi-finals. Their competitor in the final will be chosen this evening as Germany take on France. I’ve never been a huge fan of womens football, perhaps for no other reason than with mens football and my own team, i don’t have enough time, but I’ll probably make an exception on Sunday for the final.
And finally, a word of thanks to the train staff across the country who have seen fit to strike once again. As least the weather isn’t so warm today for their day off. The disruption this creates for the rest of the population is immense even though we ae more prepared for working from home after the Covid lockdowns. More strikes are due to take place on August 18th and 20th.
- 13.30 US durable goods orders
- 15.00 US pending home sales
- 19.00 FOMC rate announcement
- 19.30 FOMC press conference
- 02.30 AUS retail sales