US Fed raises hikes by 0.5% disappoints on forecasts
As we mentioned yesterday, there was a real lack of clarity over what would happen at the US Federal Reserve’s interest rate-setting meeting. They did, as expected, lift the US base rate to 1% with their 50 basis point hike but their rhetoric on future interest rate moves disappointed the markets and the US dollar actually lost ground after their statement. The thing that undermined any chance of a USD rally was the Fed’s view that even larger rate hikes would not be on the cards in the future. To be fair, they had never said there would be larger hikes but many in the markets had started to assume that would be the case. The USD dropped in value, allowing the GBPUSD rate to rise to $1.2640 before settling back to $1.2540 this morning. The EURUSD rate had a similar bout of excitement, spiking to $1.0630 before settling back to just below $1.06. Even the beleaguered Japanese Yen got in on the dollar weakness action; shooting down to Y128.60 briefly before bouncing back on profit-taking to Y129.60. We will see the weekly jobless claims from the US this afternoon, so a volatile trading session is expected.
BOE hike is expected but what’s the longer-term story
The central bank bandwagon rolls on today but all eyes switch to the Bank of England. As far as the financial markets are concerned a 25 basis point hike to bring the UK base rate to 1% is almost a foregone conclusion but the real story is the message Britain’s central bank will deliver with this statement and the speech from governor Andrew Bailey. As with the Federal Reserve and other central banks, the balancing act is between excessive inflation and the negative impacts of Russia’s actions in Ukraine. It could be argued that those two factors are inextricably linked but they present different challenges to a central banker. Raise interest rates too aggressively to temper inflation and you run the risk of killing any economic growth. So, it is likely we will see the base rate moved to 1% but a very cautious message coming out from the meeting minutes and the governor’s statement. We saw Sterling spike against the US dollar late yesterday but some of that excitement has calmed this morning and sterling hasn’t shown the same sort of strength against other currencies. E.g. The GBPEUR rate is back down to €1.1835 this morning.
AUD flattered by USD weakness
Some of the traders that sold U.S. dollars yesterday clearly bought Australian dollars because we saw the GBPAUD rate briefly dip below AUD 1.7340. In fact the GBPAUD rate has spent the last week falling. The BOE activity today could cause further decline unless the statement is very hawkish but, just to keep things interesting, we will also see the Reserve Bank of Australia’s Monetary Policy Statement overnight tonight. So volatility in this pair is highly likely.