The Federal Reserve (Fed) maintained interest rates unchanged, as expected. It revised its growth forecast higher, as expected. The peak unemployment rate was revised to 4.1%, down from 4.5% as a result of a resilient jobs market. The Fed President Jerome Powell said that they are getting close to where they want to be and that the bank must ‘proceed carefully’ on the last mile. He also said that the positive pressure on yields was due to strong growth prospects and an abundance of Treasury issuance rather than higher inflation. And the dot plot showed one more rate hike before the end of this year, and less cuts next year.  

So yes, the Fed announcement was hawkish, without much surprise. The market reaction was smooth and unsurprising, as well. The US 2-year yield spiked to 5.20%, the 10-year yield reached 4.45%. Both the S&P500 and Nasdaq slipped below their ascending base building since October, while the US dollar index extended gains and pulled out the all-important Fibonacci resistance. The index now trades above the major 38.2% Fibonacci retracement on past year’s rally, potentially marking the end of the last year’s bearish trend. The next bullish targets stand at 107 than 109 levels.  

The only thing that could slow down the US dollar’s appreciation is a hawkish shift in other major central bank’s policies. But with the European Central Bank (ECB) preparing to pause rate hikes as soon as next meeting, and the Bank of England (BoE) expected to announce its last rate hike today, we can only rely on the Bank of Japan (BoJ) to make a change. And well… I wouldn't place my bets on a hawkish BoJ even if the universe handed me a lucky horseshoe. The USDJPY is now above the 148 mark, and if the BoJ does or says nothing tomorrow, the pair could be propelled to 155. The only risk in a long USDJPY trade is a direct FX intervention from Japan. And that’s just turning the mill with carried water…  

Fifty-fifty 

Up until yesterday, the expectation was an almost certain 25bp hike from the BoE at today’s meeting, but yesterday’s shocker inflation data has shaken these expectations. In fact, no one, and even less the BoE Chief Bailey himself, was expecting to see softer inflation in Britain last month, when oil prices spiked and sterling fell. Therefore, the surprising nature of yesterday’s data release should prevent the BoE from announcing a surprise rate pause today. Because: 

  1. Rising energy prices, and falling sterling hint at potentially higher inflation in the foreseeable future, 

  2. At 6.2%, core inflation is still more than three times the BoE’s 2% inflation target.  

In summary, the BoE is not there yet. And if sterling continues to fall – which is the most plausible outcome if the BoE softens its policy stance more than necessary today, inflation in Britain will become harder to contain. As a result, a - maybe - last 25bp rate hike is on today’s menu to limit losses in sterling so that energy costs wouldn’t spike as a result of a happy CPI report, that’s happiness would remain short-lived.  

Speaking of energy, the barrel of US crude fell below the $90pb on Wednesday even though the US crude inventories fell more than 2-mio barrel last week, more than a 1.3-mio-barrel fall expected by analysts. This week’s retreat from above the $93pb is due to profit taking. The downside correction that could reasonably extend toward $86/87 range. 

This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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