The reaction to last night's Fed 25bp hike - there is clearly a lot more Fed tightening to come and the standout macro impact of the war in Ukraine is an inflationary one. The Fed debate will now turn to both the speed and magnitude of the tightening cycle, where any above consensus US data will spark calls for 50bp, not 25bp, adjustments. Yesterday, the Fed told us that the median of FOMC members expected the Fed funds target rate to be 2.75-3.00% by the end of 2023.
The market reaction since the FOMC meeting has been a strong equity rally around the world. The S&P 500 closed 2.2% higher after a hawkish Fed meeting is encouraging and suggests investors believe the best action the Fed can take now is to get inflation under control. For today, there is only second-tier US data release and the focus will remain on events in Europe and also the wild gyrations in the commodity sector.
Inflation printed above expectations, with the key core measure also rising, suggesting that the rise is not purely a commodity price issue. This will make it extremely challenging to forecast the BoC and opens up the possibility of a 50bps hike, which is something that Macklem alluded to recently. It was interesting therefore that CAD proceeded to weaken post the number and confirms that there are other dynamics at play right now. For now, USD/CAD will be a product of risk on a daily basis and with that in mind the USD/CAD is likely to move between the 1.26 -1.29 range ahead of the 13th April BoC announcement.
Most are a little surprised that EUR/USD did not stay offered near 1.0950 after the FOMC meeting, but the global rally in risk assets must be playing a role here. After a hawkish FOMC meeting, we today hear from several European Central Bank speakers at an ECB watchers conference. After the Fed's success with a hawkish message and some suggestion from sourced reports that the ECB was unhappy with EUR/USD sub-1.10, ECB speakers may be happy to support expectations that the deposit rate is raised 35-50bp by the end of the year. EUR/USD could nudge a little firmer on a risk-on day.
The Bank of England is widely expected to hike the Bank Rate to 0.75% today. The market prices the Bank Rate close to 2.25 by the end of this year. Should the BoE continue to prefer a strong GBP to insulate against higher natural gas prices and the run-up in CPI to 8% this April, it could choose to delay a rate protest until later in the year. For now, look for the GBP to remain supported.
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