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  • richard evans

Will the Fed offer a hawkish surprise?

Good morning

I know its childish but today just makes me smile. I wouldn’t call myself a super fan but I do enjoy Star Wars and if i could move my birthday to any day, it would be today.

All about US rates today and whether the FOMC announce a 50bps rise as many expect, or whether they choose to surprise the markets with a 75bps rise. I’m going for the former, although I wouldn’t be surprised if one of the more hawkish members does vote for a larger move. Will this lead to USD upside? I can’t believe the market is pricing in anything other than a hawkish Fed as high inflation continues to dominate, with the market already looking at a string of 50bps rate rises this year. Fed will have to be sound even more hawkish to set USD on a higher path although I’d imagine we’ll see a little upside as a knee jerk response.

Some mildly hawkish talk from ECBs Schnabel and de Guindos seems to have given EUR a bit of support yesterday, it was unable to hold its gains to 1.0575 but has not yet slipped back below 1.0500. They talked of possible ECB rate rises as early as July in order to control inflation. Currently 1.0525, almost exactly where it was this time yesterday, but has made a bit of ground against GBP, EURGBP now 0.8415 (GBPEUR 1.1885). Keep watching 0.8460 (1.1820).

GBPUSD traded up to 1.2565 yesterday afternoon but couldn’t stay up there long, falling back below 1.2500 by London close to test 1.2470 a couple of times. As I type it is working its way back above 1.2500. Surely GBP can find some support from a rate rise tomorrow. I guess the question is whether we stick with a simple 25bps or whether BoE follow the lead of a few central banks recently and move 50bps.

For HKD watchers, there has been a suggestion that the USDHKD peg could soon break so watch 7.8500 closely. A real punt I know but just around $1,000 would buy $1m of a one month 7.85 USDHKD call, or the same could be had for $1700 with a three month expiry. Be warned, we’ve not been above there in my time in FX which takes us back to the mid-90s, so its very much an outside chance.

Aussie retail sales hit a record high overnight although as I mentioned a week or two ago, I would still like it clarified whether the numbers are high because of price increases or increased demand. AUDUSD at 0.7100, AUDNZD has held above 1.1000 since RBA rate rise, now at 1.1035. Goldmans has said it sees RBA rates at 2.6% by the end of 2022 with June and July both earning a 50bps raise, while RBAs Lowe has hinted at 2.5% in the medium term. Should keep AUD supported for now. RBNZs Orr

In China, students are set to enjoy a further weeks holiday, their break extended due to Covid. Beijing has seen part of its subway system closed after an increase in cases, as they still try to work with this zero covid policy. The rest of China should be back tomorrow.

That’s all for now folks, seem to be running a touch late this morning. Good luck.

- 10.00 EU retail sales

- 13.15 US ADP employment

- 13.30 US goods trade balance

- 13.30 CAD trade balance

- 14.45 US S&P PMIs

- 15.00 US services ISM

- 19.00 FOMC rate announcement

- 19.30 FOMC press conference

- 02.30 AUS trade balance, building permits

- 02.45 China caixin PMI

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