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Is A Fed 100bp Rate Hike In The Cards?

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It’s Federal Reserve decision day and anything from a 50bp to a 100bp in the federal funds rate is forecast. The Fed is facing the highest U.S. inflation in four decades which is why some market participants suggest that a full-percentage hike is on the table to show the Fed’s commitment in the inflation fight. However, chances of such a big move are only at 10 percent. The baseline scenario is a 50bp increase at today’s meeting.

The FOMC committee will release a statement and updated economic estimates at 18:00 UTC and Fed Chair Jerome Powell will hold a press conference 30 minutes later.

How will the U.S. dollar react?

In case of a well-priced-in 50bp rate hike, the dollar could even fall on disappointment. In case of a 75bp rate hike, the dollar will further strengthen. And in case of a 100bp hike, it will be a very bullish scenario for the greenback but chances of such a hike are small.

Furthermore, the focus will be on the Fed’s dot-plot, growth, inflation and jobs forecasts. Particular attention will also be paid to Powell’s press conference.

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Bleak Economic Outlook

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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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Trübe Wirtschaftsaussichten

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Willkommen zu einer neuen Handels- und Zinserhöhungswoche.

Nachdem die Inflation in den USA erneut unerwartet stark gestiegen ist, steigen die Chancen für eine Zinserhöhung der Federal Reserve um 75 Basispunkte auf den kommenden FOMC-Sitzungen.

Es wird erwartet, dass die Fed die Zinssätze am Mittwoch um 50 Basispunkte anhebt, aber das Hauptaugenmerk wird auf der vierteljährlichen Zusammenfassung der Wirtschaftsprojektion liegen, die auch die Dot-Plot-Zinsprognosen enthält. In Anbetracht der jüngsten Inflationsentwicklungen könnten die Währungshüter in diesem Jahr einen steileren Zinserhöhungspfad einplanen. Während eine Zinserhöhung um 50 Basispunkte in diesem Monat so gut wie sicher ist, spekulieren Händler auf eine noch stärkere Zinserhöhung um 75 Basispunkte, und wenn nicht im Juni, dann vielleicht im Juli. Abgesehen von der strafferen Geldpolitik verlagert sich der Schwerpunkt auf die breiteren Auswirkungen der Politik der Zentralbank auf die Wirtschaft. Aggressive Zinserhöhungen haben kaum Auswirkungen auf den steigenden Preisdruck, während sich die Wirtschaft indes abkühlt. Die Ökonomen von Bloomberg schätzen die Wahrscheinlichkeit einer Rezession im nächsten Jahr auf drei von vier und sagen: “Ein Abschwung im Jahr 2022 ist unwahrscheinlich, aber eine Rezession im Jahr 2023 wird schwer zu vermeiden sein”.

Zu guter Letzt wird allgemein erwartet, dass die Bank von England am Donnerstag ihren Zinssatz von 1 % auf 1,25 % anhebt. Einige Marktteilnehmer rechnen sogar mit der Wahrscheinlichkeit einer Anhebung um 50 Basispunkte, doch scheint dies das wesentlich unwahrscheinlichere Szenario zu sein. Insgesamt wird erwartet, dass das Pfund noch weiter fallen wird, da die britische Wirtschaft in der nächsten Zeit zu kämpfen haben dürfte.

GBP/USD – Ausbruch nach unten

Das Pfund Sterling brach unter 1.24 und das Jahrestief bei 1.2155 ist nicht mehr weit entfernt. Die Bären werden sich nun auf Kursdurchbrüche unter 1.2240 und 1.22 konzentrieren. Wenn das Jahrestief überwunden wird, dürfte einem Rückgang in Richtung 1.20 nichts im Wege stehen. Die ehemalige Unterstützung bei 1.24 könnte nun als Widerstand dienen.

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Inflation Is The Biggest Risk

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The war in Ukraine enters its third week and the outlook for financial markets is seriously uncertain. Global geopolitical risk, a slowdown in growth, high inflation and central banks that will be forced to tighten add to concerns about the global economic recovery.

The biggest risk is inflation. The Federal Reserve is expected to lift interest rates by 25bps on Wednesday. The focus will however be on the Fed’s official forecast and the outlook beyond the six quarter-point rate hikes this year that are already priced in. The questions will rather be: How high could rates ultimately go and how quickly will officials move to get there. The Fed’s dot plot of rate projections will thus play a key role.

Apart from the Fed, the Bank of England is also widely expected to hike 25bps for a third straight meeting on Thursday.

What do we expect technically in both EUR/USD and GBP/USD pairs?

In the run-up to Wednesday’s FOMC decision we anticipate further USD strength with lower targets seen at 1.0730-1.07 in the EUR/USD and 1.2970-1.2950 in the GBP/USD.

GBP/USD: If 1.2950 holds, the cable may recover some losses towards 1.32 on a hawkish BoE.

EUR/USD: If the euro is unable to break above 1.1050, chances remain in favor of the bears with next lower targets seen at 1.07 and 1.0640.

 

Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.

 

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ECB To Remain Dovish?

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Market participants seems to be having enough of the U.S. dollar rally while the greenback may have reached the peak of its rally.

The Federal Reserve announced that it will double the pace of its taper to $30 billion a month and projected three quarter-point interest rate increases in 2022, another three in 2023 and two more in 2024.  The updated dot plot shows a much more aggressive tightening cycle than envisioned in September when Fed policy makers saw only half a hike.

Despite the Fed’s hawkish turn, the market’s reaction was muted since much of the move was already priced in. We bear in mind that if the demand for dollars is fading, it could mean that a reversal is just around the corner.

Having the Fed behind us, the Bank of England and the European Central Bank will release their respective policy statements today.

The Bank of England surprised markets at its last policy meeting by electing not to raise interest rates despite rampant inflation. The central bank may choose to hold off on a rate hike yet again, as the country struggles with the spread of the Omicron variant. However, rate hikes are just around the corner while the BoE is expected to hike next year.

The European Central Bank was sounding more dovish of late than other central banks. While the ECB may announce an alteration to its pandemic emergency purchase program (PEPP), policymakers may choose to remain dovish as the continent struggles with Omicron. The reemergence of lockdowns and rising infection rates could hamper Eurozone growth, which could force the ECB to remain dovish for the near-term. Economists don’t expect the first rate increase until 2023 at the earliest. Any hawkish surprise today will let the euro fly.

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