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  • richard evans

Putin escalates, FOMC to raise rates

Good morning

Two key items in the headlines today. Fed rate announcement and Ukraine.

I’ll start with Ukraine as Putin signals a change which could lead to a dangerous escalation in the invasion of Ukraine. Putin has talked of referendums in four occupied areas to ask whether they should become part of Russia. The result of course would be in no doubt, and the West has said it will never recognise the results of these ‘sham ballots’. However once the ‘results’ are in, it would mean Putin would say any attack in the areas is an attack on Russia itself, which greatly increases the chances of a major escalation.

In an address to the Russian people, Putin has announced mobilisation of some 300,000 Russian reservists, people who have previously served in the army, to defend Russia’s territorial integrity. He also mentioned that he will use all the means he has, once again raising the potential for use of nuclear weapons. The war Putin has started is not going his way and he needs to do something to prevent Ukrainian forces advancing further into Russia held territory. Putin says he is not bluffing and I have to say it would be a mistake to not take him seriously.

US dollar, which was already strong ahead of the FOMC rate meeting, has pushed higher still in response to Putin. EURUSD is trading down at 0.9900, this despite Lagarde suggesting that ECB should do more to front load rates. GBPUSD is down at 1.1345, again the potential for a larger than expected 75bps rate rise tomorrow doing little to help the pound. Gold has found a little support, trading up from low $1660s to $1675 in something of a safe-haven move.

On the subject of rate rises, we have the FOMC rate announcement this evening. A 75bps rise is priced in, the question is whether they go further with a full 1% rate rise. The statement will be closely watched whatever the rate increase for any clues as to the pace and/or size of any future increases. Rates now are 2.5%, market pricing suggests they will reach 4% in the not too distant future. Powell made it clear the Fed are nowhere near finished and I would expect more of the same from him. Difficult to see how this announcement can be anything other than hawkish regardless of the size of this move.

I have said for a while now that GBPUSD has room to fall. I have been looking at various downside GBPUSD trade ideas in recent weeks and to be honest it wouldn’t matter which one you chose, they are all performing well. I continue to think GBP will underperform and I will continue to look at downside trades.

We will also see a rate announcement from BoJ in the early hours of tomorrow morning. I had thought we could see some hawkish news but I have to say with the Fed and Putin, impact from BoJ could be limited.

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 22.00 NZ Westpac consumer survey

- 23.45 NZ trade balance

- 04.00 BoJ rate announcement

- 07.00 BoJ press conference

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