Jamie Jemmeson
May 4, 2022

Dollar continues its surge ahead of Fed meeting

Wage provides Sterling with a lift; will retail sale echo the same?

Major currency crosses were relatively unchanged during early trading this week as the US dollar held close to recent highs against several major pairs. The Dollar remains underpinned by rising US government bonds and ahead of an expected hawkish policy announcement by the FOMC, where policymakers are expected to announce a second successive interest rate hike on Wednesday. The FOMC Committee is expected to raise interest rates by 50-basis points, as has been already largely signalled in recent weeks. A great deal of attention, however, is expected to fall on the subsequent press conference by Chair Jay Powell, where the Fed’s rate path and the timing of the start of the reduction of the Fed’s balance sheet are seen taking centre stage. Powell is expected to signal the likelihood of several further interest rate hikes following recent official’s comments that US interest rates may rise to 2.5% to curb inflationary pressures.

The Fed’s aggressive rate path continues to be the main driver underpinning the Dollar, which also appears reinforced by the current elevated inflation rates and the robust condition of the labour market. In addition, today’s meeting is expected to confirm that the Fed will now begin to reduce its asset purchase holdings, which is likely to begin next month after the latest Fed minutes signalled policymakers widespread appetite to reduce its balance sheet.

Key data releases scheduled for the remainder of this week include today’s ADP employment report and Friday’s non-farm payrolls data. Meanwhile, the Consumer Credit and final Services PMI data will also draw attention following reaction to the Fed announcements on Wednesday.

Will the BoE Meeting provide some clarity to the market

Tomorrow will be the Bank of England’s (BoE) turn to release its latest monetary policy. A fourth consecutive increase in interest rates by the BoE seems to be on the cards; in what may turn out to be a dovish hike. It is expected that the majority of the nine-strong Committee to vote for a further 25bp increase in Bank Rate to 1.00%, taking it to its highest since 2009. However, at least one member, most likely Deputy Governor Cunliffe, may vote against a May hike, just as he did in March. It should also be noted that economic data of late has shown that the economy has lost some of its momentum given the well-publicised cost of living crisis.

In addition to monetary policy, the BoE will release their latest set of economic projections which will factor in its assessment of the direct impact of the war in Ukraine on growth expectation and path of inflation moving forward. Currently the market is expecting interest rates to the implied rate of 2.32% with 163 basis points worth of hikes before the end of the year. Based on the rhetoric and the forecast the market may adjust their projections. Dovish commentary and a downgrade in growth could result in a reduction of the implied interest rate for yearend which in turn could make Sterling more vulnerable. However, a more optimistic tone and set of forecasts could push Sterling higher.

The market to look for further clues on monetary policy

With interest rates being the main focus of markets currently, it is worth noting that European Central Bank (ECB) council member Schnabel stated that the central bank may need to raise interest rates in July to combat extreme inflation and that it was time to act. The ECB’s next monetary policy meeting is in June and is currently showing a 58% probability of 10 basis point hike. Before the end of the year the market is currently forecasting an implied 95 basis point worth of hikes taking the deposit rate out of negative territory. This is a big turnaround from the beginning of the year where no hikes were expected for 2022.

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