Good morning
US and Asian markets posted gains as officials seem to manage to bring a sense of calm over the banking crisis. Reports suggest that funds withdrawals from regional banks have slowed as Treasury Secretary Yellen inferred that deposits at small US banks could be guaranteed by the government.
UK inflation numbers came out firmer than expected this morning which will likely leave BoE no choice but to raise rates again tomorrow, a 25bps rise from 4% to 4.25% is widely expected. GBPUSD moved higher on the release and as I type is currently testing Mondays highs in the 1.2280 area.
Main focus today clearly on Fed rate decision. Current thinking seems to be a 25bps rise with a dovish tilt to the accompanying statement. Plenty of players looking for a weaker USD should this be the path the Fed choose to take and I have seen upside EURUSD and downside USDJPY trade ideas as a result. Positive comments from ECBs Nagel over the EU economic outlook offers support for EURUSD, the pair now around 1.0780, some looking for a move to the 1.09+ area.
However a rate rise is not a foregone conclusion. It is possible they choose to keep rates unchanged but with a message that this is simply a pause while the banking crisis unfolds, rather than a dramatic turn, perhaps pointing to a larger rise next time around. However this could backfire and lead to greater concern about the fragility of the banking system rather provide comfort.
We also have the ‘dot plot’ from FOMC, their idea of rate expectations. It is highly unlikely these will show higher than previously, the key question is whether Fed officials keep them as they were or lower their forecasts. If they keep them as they are, the market still thinks they are on the high side but if they lower them I could see a little more USD weakness.
There are so many variations on the rate move and Powells direction in the statement, whether he chooses to calm markets with some dovish talk or keep his ‘Fed must do more’ rhetoric. I don’t remember going into a Fed rate meeting with so much uncertainty.
Looking at trade ideas, we must surely look for something in case of USD weakness. Could be upside GBPUSD or EURUSD (overnight 1.2350 costs 35usd pips, overnight 1.0850 costs 23 usd pips) or downside USDJPY (overnight 131.50 put costs 40 yen pips). Just a selection of possibilities for you to consider.
Meanwhile Putin and Xi seem to have got on well, talking of new trade agreements and oil/gas supplies to Asia. Sanctions may be hitting Russia but they do seem to be weathering that storm and things would get easier still with Chinas help. Whether China will provide weapons for Russia’s war on Ukraine remains to be seen.
For now, we will listen to ECB officials say their bit through the day, but FOMC obviously the key event.
- 09.30 ECBs Lane speaks
- 13.45 ECBs Panetta speaks
- 17.00 ECBs Nagel speaks
- 18.00 FOMC rate announcement
- 18.30 FOMC press conference