Federal Reserve Guidance Seen as a Balancing Act
It was another turbulent week across financial markets as the Federal Reserve (Fed) began its rate tightening cycle as equities and commodity prices remained volatile. The US Central Bank announced it had increased its policy rate by 25-basis points in a widely expected decision as attention was given to the hawkish nature of the accompanying summary of economic projections. The so-called dot-plot, which the central bank uses to signal its outlook for the path of interest rates, revealed that policymakers are expecting six more hikes this year and that the median of the Federal Open Market Committee (FOMC) members expected the Fed funds target rate to be 2.75% – 3% by the end of 2023. On Friday, Richmond Fed President and FOMC member Thomas Barkin commented that the interest rate path signalled this week is a balancing act between fighting inflation and managing uncertainty around the post-pandemic economic recovery. The Fed may move faster with 50-basis-point hikes, should inflationary pressures require policy action to accelerate.
Looking ahead to this week, Geopolitical headlines are likely to continue to dominate financial market volatility as the war in Ukraine enters its fourth week. The sharp rise in commodity prices triggered by the war in Ukraine continues to present policy challenges for central banks. Highlights on the economic calendar include new home sales data, Flash PMI’s and the University of Michigan Consumer Sentiment index later on the week. Fed Chair Jerome Powell is set to speak early in the week which will provide investors with an opportunity to assess how policymakers see the Feds likely action over the forthcoming policy meetings.
UK Attention Turns to Chancellors Spring Statement
The highlight event last week saw the Bank of England (BoE) raise interest rates by 25-basis points to 0.75%. The Monetary Policy Committee (MPC) voted 8-1 to hike rates with one of the nine members, Cunliffe, dissenting and calling to leave rates unchanged. There were therefore no calls for a 50-basis point hike and notably, the language was softened to further modest tightening in monetary policy ‘may be’ appropriate in the coming months. Policymakers cautioned market expectations that the bank rate would reach 2% before the end of this year as extreme. Overall, current market pricing for another 125-basis point hike by the BoE this year appears excessive amid increasing concerns about headwinds to growth.
Looking ahead to this week, the focus will centre around Chancellor Rishi Sunak’s Spring Statement and the latest Consumer Price Index (CPI) inflation figures. Both releases are scheduled for release on Wednesday and the Spring Statement comes amid sharply rising inflation and calls for more policy action to cope with rising energy costs. The Office for Budget Responsibility’s (OBR) updated economic growth forecasts are expected to have lowered from last October’s 6.0% for 2022 and 2.1% for 2023, meanwhile headline inflation is forecasted to be significantly higher than the OBR’s previous forecast of 4.0%.
EU Risk Sentiment Supports the Single Currency
The Euro had a mixed performance last week, making gains against safe-haven currencies as expectations for a diplomatic resolution improved between Russia and Ukraine. With hopes rising for a ceasefire, risk appetite proved resurgent which helped to underpin the recently decimated Euro. Markets continue to focus on the Russian invasion of Ukraine and its knock-on effects on the European economy, dwarfing data releases. Notably, last week saw an abundance of comments by various European Central Bank (ECB) members, which have offered various indications on when the Bank’s tightening cycle may begin.
Looking ahead this week, it’s a light economic calendar as the focus continues to remain on the Russian invasion of Ukraine and its knock-on effects on the European economy. Key data releases scheduled for release include EU flash PMIs for manufacturing and services, which are expected to fall, with a focus also on indications of the Ukraine war impact on input prices. Given the recent differences in rhetoric between ECB policymakers and Christine Lagarde’s commentary, the focus will centre on Lagarde’s speech early this week in Paris, followed by ECB Executive board member Panetta and ECB Chief Economist Philip Lane. Later in the week, the European council meet as investors look for fresh clues over the timing of rate hikes.
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