The US Dollar remains relatively unchanged against its major trading pairs following the announcement overnight that the Federal Reserve (Fed) increased its policy rate by 25-basis points following its two-day meeting in a widely expected decision. Particular attention was given to the hawkish nature of the accompanying summary of economic projections. The so-called dot-plot revealed that policymakers were expecting six more hikes this year and that the median of Federal Open Market Committee (FOMC) members expected the Fed funds target rate to be 2.75-3.00% by the end of 2023.
The initial market reaction saw the Dollar gain ground against the Pound and Euro and a strong equity rally across global stock markets. Meanwhile, the US 10-year Treasury yield increased sharply. However, Fed Chair Jerome Powell’s statement was largely aligned with expectations which saw the greenback weaken later in the session. Powell commented that policymakers were still expecting inflation to fall in the second half of the year, despite heightened uncertainty that the US economy and labour market can handle higher interest rates.
It’s a quiet economic calendar today as investors continue to digest the Fed’s commentary. Industrial production and housing activity data will be monitored later in the session.
Will the Bank Of England Prioritise Inflation Over Growth?
Sterling made gains against the Dollar as diplomatic efforts continued to negotiate a resolution between Russia and Ukraine. Today is the Bank of England (BoE) meeting with the latest Monetary Policy due for release. Developments in Ukraine are likely to feature highly on the agenda, especially with the rise in oil prices of circa 40%. Survey and financial market-based measures of inflation expectations have also risen and are likely to climb higher as the annual rate of inflation moves even further above target.
The market is expecting a bank rate hike by 25bp to 0.75% with the decision likely supported by most, if not all, nine members of the Monetary Policy Committee (MPC). However, the market will be keener to understand the rhetoric that supports the decision making and whether this provides any signposting for the path of interest rates for the remainder of the year.
Attention Turns to European Central Bank Speakers
The Euro continued to consolidate against the US Dollar yesterday following the US Fed rate decision and as diplomatic efforts continued to negotiate a resolution between Russia and Ukraine. Last week the European Central Bank (ECB) commented that it may end its asset purchase program as surging inflation pressures will outweigh ongoing geopolitical uncertainty. Inflation in the Eurozone is currently running at a record high and is expected to become more persistent due to higher commodity prices.
Looking ahead to today, investors’ attention will focus on several ECB speakers, including President Christine Lagarde’s scheduled speech at the Institute for Monetary and Financial Stability (IMFS) in Frankfurt as investors look for fresh clues over the timing of rate hikes to curb record inflation rates. Lagarde has recently commented that greater optionality or flexibility was needed to deal with the risks of higher inflation. Elsewhere today, Eurozone final CPI inflation for February is expected to confirm the flash estimate showing a rise in the annual headline rate to 5.8%.
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