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Jamie Jemmeson
January 27, 2022

Dollar Rallies as Hawkish Federal Reserve Hint at March Rate Hike

UK Retail Sale Post Positive Reading. Can This Continue?

The Greenback rallied against several major currencies on Wednesday as the Federal Reserve (Fed) provided the market with the anticipated hawkishness at its January meeting. The Federal Open Market Committee’s (FOMC) statement included the information that had been expected as policymakers voted to keep rates on hold, however, the positive comments in the press conference saw the dollar index hit a 3-week high as FOMC Chairman Jay Powell commented that it would be necessary to raise the cost of borrowing to take inflation amid a strong labor market. Powell noted in his press conference that the central bank is ready to raise interest rates and didn’t rule out hiking at every meeting to curb the highest inflation pace in a generation and ending its tapering program by March. Powell further noted that there was ‘quite a lot of room to raise rates without impacting the labor market’ and that the Fed may start to reduce its asset holding later in 2022.

Following the comments, markets priced in a 90% chance of five quarter-point hikes in 2022. Ahead of the meeting economists had priced in three to four rate hikes for 2022. The positive comments initially weighed heavily on global equities indexes which Japan’s Nikkei fell by 3% and China’s CSI fell sharply by 2%. The benchmark 10-year Treasury yield surged higher by 5%, hitting 1.9% as risk aversion trading dominated the later part of Wednesday’ session. The US dollar hit one-month high levels against both the Euro and Sterling with gains extending into early trading on Thursday.

Following the Fed’s hawkish outlook, markets will today turn their attention to the release of the first estimate of fourth-quarter Gross Domestic Product growth (GDP). The US Census Bureau will also release Durable Goods Orders. Also due for release is weekly initial jobless claims and pending home sales data.

Sterling Slides Against The US Dollar

It was a quiet day in terms of economic data from the UK yesterday as we saw Sterling give up ground against the US Dollar following the FOMC policy meeting. Closer to home, political developments were sparse as the highly anticipated Sue Grey report was not released as it undergoes final legal consultation to ensure it will not interfere with the police investigation.

Concerns surrounding the stickiness of inflation with the pending national insurance rise and removal of the energy price cap has prompted further political debate amidst “partygate” and the favour of the electorate.

Looking ahead to today, the CBI realised sales numbers will be released which should provide some context on consumer confidence and activity. In the meantime, the timing of the Sue Grey report release is likely to dominate headlines.

Geopolitical Tension Hinder Single Currency

A baron macro-economic calendar yesterday provided little to offer direction for the Euro. Instead, markets focused on the growing tensions on the Ukrainian border with the UK now considering the deployment of hundreds of military personnel to Eastern Europe before a possible Russian invasion. There is growing pressure from Britain and Germany to use the Nord Stream 2, the gas pipeline which skirts Ukraine and provides Russian gas to Europe as additional leverage against Moscow. If tensions continue to escalate, we could see a risk-off move with investors moving away from the Euro towards the safe-haven US Dollar.

Looking ahead at today, we have the German GfK Consumer Climate which is a leading indicator of consumer spending. The figure, already released this morning, read above forecast at -6.7 versus an expectation of -7.9 and a previous reading of -6.9. Additionally, Spanish Unemployment is due this morning and expected to show a decrease in unemployment from 14.6% to 14.2%.

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