Bleak Economic Outlook

Welcome to a new trading and central bank rate-hike week.

After an unexpectedly higher U.S. inflation reading last Friday, chances for a 75bp Federal Reserve rate hike at the upcoming FOMC meetings are rising.

The Fed is expected to raise rates by 50bp on Wednesday but the main focus will be on the quarterly summary of economic projection which includes the dot-plot rate projections. Fed policy makers may pencil in a steeper path of interest rate hikes this year in the light of recent inflation developments. While a 50bp rate hike this month is all but certain, traders speculate on an even bigger rate hike of 75bp, and if not in June, then maybe in July. Apart of the hawkish guidance, the focus is shifting to the broader impact of the central bank’s policies on the economy. Aggressive rate hikes are having little effect on rising price pressures while the economy is cooling. Economists at Bloomberg put the chances of a recession at three in four next year saying “a downturn in 2022 is unlikely, but recession in 2023 will be tough to avoid”.

Last but not least, the Bank of England is widely expected to raise its interest rate on Thursday from 1 percent to 1.25 percent. Some market participants even price in some probability of a 50bp hike but this seems to be the much more unlikely scenario. Overall, the pound is anticipated to fall even further since the U.K. economy looks set to struggle.

GBP/USD – Bearish breakout

Sterling broke below 1.24 and the yearly low at 1.2155 isn’t all that far away now. Bears will now focus on price breaks below 1.2240 and 1.22. If the yearly low is cleared, there might be nothing in the way of a fall towards 1.20. The former support at 1.24 could now serve as a resistance.

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