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Upbeat Mood Ahead of FOMC Rate Decision

The US Dollar opened on the back foot on Wednesday as investors remain optimistic about a possible diplomatic solution in Russia-Ukraine ceasefire talks. Earlier on Tuesday, Ukraine President Volodymyr Zelenskyy commented he was confident they could reach a diplomatic solution in the next one to two weeks. The overall improvement in risk sentiment was evident across financial markets, which drove flows away from traditional safe-haven assets. In another sign of improving risksentiment, Asian equities were up overnight, led by a rebound in Chinese stocks following a sharp decline on Monday. Elsewhere, US government bond yields were up, with the yield on the 10-year Treasury note reaching a multi-week high of over two percent. The US Dollar index was relatively unchanged and continues to consolidate around the 99.00 level.

Looking ahead to today, investors will await a key Federal Reserve decision where policymakers are widely expected to vote for a 25-basis point hike to tame surging inflation. Investors will pay close attention to the updated Summary of Economic Projections and FOMC Chairman Jerome Powell’s comments on the policy outlook. Ahead of the Fed announcement, markets will digest US retail sales data for February which is expected to show a modest monthly increase following January’s higher than expected jump.

German investor confidence records all time biggest drop

It was no surprise given the geopolitical backdrop that we saw a record slide in German investor sentiment in March’s reading. The ZEW economic research institute said its economic sentiment index dropped to -39.3 points from 54.3 in February. The fall was the biggest since the survey began in December 1991. A Reuters poll had pointed to a reading of 10.0 for March. The war in Ukraine and the sanctions against Russia are significantly dampening the economic outlook and increasing the probability of a recession. The increase concern here is that the European Central Bank said last week it will stop pumping money into financial markets this summer. The single currency remains fragile and continues to trade on risk based sentiment.

ECB President Lagarde stated that inflation is still expected to decline progressively in all scenarios and settle around the 2% target in 2024. She did, however, add that uncertainty surrounding the outlook has increased significantly.

Unemployment falls to pre pandemic levels ahead of tomorrow’s BoE meeting

U.K. unemployment dropped below its pre-pandemic level for the first time as companies generated more jobs and granted higher wages than expected. The jobless rate fell to 3.9% in the three months through January, the lowest since the start of 2020. The figures also showed the redundancy rate fell to a record low and job vacancies reached a new high, adding to evidence of a strong recovery from Covid-19 in the weeks before the war in Ukraine.

Today the focus will be on the FOMC meeting whilst tomorrow, the Bank of England takes centre stage with another rate hike predicted.

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