May 2022

Outlook: The major-currency central banks are done for the moment and we’re back to policy rhetoric and watching inflation. Oh, yes, and Fed-bashing. The CME Fed funds tool yesterday, before the Fed decision, had shown a 95% chance of a 75 bp hike. That has now fallen to zero, of course, but accompanied by accusations of the 50 bp we did get was “dovish.” The dovish label applies mainly to the QT methodology—let the paper fall off the balance sheet as it matures—and not the hike per se, but it’s the worst thing that can happen to the Fed—a bloodthirsty market. The 75 bp fantasy came from a single Fed (Bullard) making a one-time comment that he qualified by saying it’s not his preferred base case, but the market ran wild with it like a horse with a bit in his teeth. In contrast, the 50 bp version, also started by Bullard, was quickly picked up a bunch of other Feds , including chief Powell, and widely publicized. Why the market chose a single comment from a single Fed to hang its hat on is a mystery. The market erred. The Fed signals its intentions with great clarity these days. But… Read More »We’re back to policy rhetoric and watching inflation – Oh, yes, and Fed-bashing

The Bank of England (BOE) is set for a 25 bps rate hike on Super Thursday. The no. of dissenters and the BOE’s forward guidance will hold the key. Nothing can stop GBP/USD’s downfall amid aggressive Fed bets and bearish technicals. GBP/USD remains exposed to downside risks, as we progress towards the Bank of England (BOE) ‘Super Thursday’. Another 25 basis points (bps) rate hike remains on the table from the BOE, although it would not be enough to rescue GBP bulls. The UK central bank is set to announce its policy decision at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report. BOE walking a tight rope May’s ‘Super Thursday’ will likely see the BOE delivering another 25 bps interest rate hike, lifting its benchmark rate to 1%, the highest since 2009. This would be the fourth straight rate hike, making it the first time the BOE has tightened that way since 1997. BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT. Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023.… Read More »BOE Preview: A 25 bps rate hike can’t save GBP bulls amid economic gloom

GBP/USD witnessed some short-covering move on Wednesday amid broad-based USD weakness. Fed Chair Powell downplayed the possibility of super-size hikes and weighed heavily on the buck. Expectations for a further tightening by the Fed revived the USD demand and capped the major. Market participants now look forward to the BoE monetary policy decision for a fresh impetus. The GBP/USD pair rallied nearly 200 pips intraday and shot to over a one-week high on Wednesday amid the post-FOMC US dollar downfall. As was widely expected, the US central bank announced the largest interest rate hike since 2000 and the start of quantitative tightening (QT). The Fed raised its benchmark interest rate by 50 bps and said that its near $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August. The reduction would increase to as much as $95 billion per month in September. The USD, however, witnessed a typical ‘buy the rumour, sell the news’ kind of trade after Fed Chair Jerome Powell downplayed expectations for an aggressive tightening path. In the post-meeting press conference, Powell said that the Fed was not actively considering a 75 bps rate hike and that policymakers… Read More »GBP/USD Analysis: Post-FOMC rally fizzles out rather quickly, focus shifts to BoE

Fed Chair Powell has ruled out a 75 bps rate hike, cooling hawkish expectations.  By saying neutral rates are between 2% to 3%, markets see light at the end of the tunnel. A late focus on supply-related inflation puts additional limits to Fed action.  The dollar remains the currency of choice as other central banks are not as aggressive. The Federal Reserve has lifted its leg from the hawkishness pedal – but remains en route to “expeditious” tightening, which is set to keep the dollar bid. After a series of hawkish comments on the impact of inflation – and kicking off the presser by talking directly to the American people – Fed Chair Jerome Powell sent the dollar higher. But, traders want to know what's next. First, Powell then all but ruled out a highly aggressive 75 bps rate hike, providing clear guidance about 50 bps hikes in both June and July. That puts one limit on rates and on dollar strength. Secondly, the Fed Chair said that a neutral rate would be somewhere between 2% to 3%. According to the plan for the next two months, interest rates will reach a range of 1.75% to 2% already in July,… Read More »Fed Quick Analysis: Powell deals three blows to the dollar, but there is no alternative to the king

EUR/USD struggled to capitalize on the overnight positive move to the 1.0575-1.0580 area. Aggressive Fed rate hike bets continued acting as a tailwind for the USD and capped gains. Investors eye the US ADP report, ISM PMI for some impetus ahead of the FOMC decision. The EUR/USD pair gained some positive traction on Tuesday amid modest US dollar weakness, though the intraday uptick lacked bullish conviction and ran out of steam near the 1.0575-1.0580 area. Given that the Fed's anticipated move to hike interest rates this week is already priced in, a positive risk tone undermined the safe-haven buck and extended support to the major. Traders, however, seemed reluctant to place aggressive bets and wait to see if the US central bank is ready to hike rates further to curb soaring inflation, even if the economy weakens. Hence, the market focus will remain glued to the outcome of a two-day FOMC monetary policy meeting. The Fed is scheduled to announce its decision later during the US session this Wednesday and is widely expected to raise interest rates by 50 bps. This would mark the first supersized rate increase since 2000 and the first back-to-back hike in 16 years. The US… Read More »EUR/USD Analysis: Hangs near multi-year low, bears await hawkish Fed before placing fresh bets

The US central bank is set to hike its policy rate by 50 basis points in May. The Fed is also expected to start shrinking its balance sheet by $95 billion per month from June. A 'buy the rumor sell the fact' market reaction could weigh on the dollar. The US Dollar Index (DXY), which tracks the dollar’s performance against a basket of six major currencies, rose nearly 5% in April fueled by the Fed’s apparent willingness to tighten its policy in an aggressive way. The FOMC is widely expected to hike its policy rate by 50 basis points (bps) following the May policy meeting and unveil its plan to start shrinking the balance sheet by $95 billion per month from June. Markets have been buying the rumor and the question on traders’ minds will be whether it will be the right time to sell the fact when the Fed announces its policy decisions on Thursday, May 4? Hawkish scenario According to the CME Group FedWatch Tool, markets are pricing a 94.5% probability of a total of 125 bps in the next two meetings. Additionally, the benchmark 10-year US Treasury bond yield is already up more than 50% since early… Read More »Fed May Preview: ‘Less hawkish’ is the new dovish

China is the world's second-largest consumer and the world’s top importer of crude oil. In the face of adversity, is its economy likely to slow down? Crude oil prices ended slightly higher yesterday after a volatile session, caught between weakening demand in China and the prospect, closer than ever, of a European embargo on Russian oil imports. In the economic capital of Shanghai, where more than 25 million inhabitants have been locked up for a month, anyone who tests positive for coronavirus is sent to a quarantine center, even if they are asymptomatic. Apparently, China is sticking to this “zero-covid” policy that, ironically, has even become a new standard of freedom as similar restrictive models that run counter to individual freedoms were followed by some countries, including Australia, Canada, and New Zealand not so long ago. On the other hand, several countries, including Hungary, Denmark, France, the United States, and Britain, have recently announced they are moving their embassies back to Kyiv as the security situation in the Ukrainian capital improves. As Hungary will not support sanctions on Russian oil and gas shipments, Slovakia says it will seek exemption from any EU embargo on Russian oil. Therefore, the EU executive… Read More »China faces trouble as the EU nears embargo on russian oil

The Federal Reserve is very likely to raise rates today to 0.50%. There is a case to be made for the idea of raising rates immediately to 0.75%. Let’s get this ball rolling. The Federal Reserve is so incredibly behind the curve it is embarrassing to the entire nation. The days of easy money are over. Get over it everyone. Most market participants will be trying to cross the valley without a bridge believing that as the market is expecting a hike it is already priced in. So take advantage and buy into this. It is a psychological subset of always looking across the valley and buying the dip which has pervaded equity markets for the past two years with a high degree of intensity. Human beings decision make/function on the pillars of recency, frequency and intensity. So we have a perfect set up as the fundamental underpinnings fade away under the hoofs of all the bulls, read the entire herd, and they stand their ground only to find themselves in the midst of a nothing but a sea of potential sellers. As an economists of some years, can I tell you it has never looked as ugly as this.… Read More »Forget the RBA, the Fed is about to burn it all

The Federal Reserve is very likely to raise rates today to 0.50%. There is a case to be made for the idea of raising rates immediately to 0.75%. Let’s get this ball rolling. The Federal Reserve is so incredibly behind the curve it is embarrassing to the entire nation. The days of easy money are over. Get over it everyone. Most market participants will be trying to cross the valley without a bridge believing that as the market is expecting a hike it is already priced in. So take advantage and buy into this. It is a psychological subset of always looking across the valley and buying the dip which has pervaded equity markets for the past two years with a high degree of intensity. Human beings decision make/function on the pillars of recency, frequency and intensity. So we have a perfect set up as the fundamental underpinnings fade away under the hoofs of all the bulls, read the entire herd, and they stand their ground only to find themselves in the midst of a nothing but a sea of potential sellers. As an economists of some years, can I tell you it has never looked as ugly as this.… Read More »Forget the RBA, the Fed is about to burn it all