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Last week hosted an eventful week from FOMC members with speeches shifting markets lower and fulfilling trader’s bets of an aggressive Fed tightening program. It is clear from the Fed’s perspective they need financial conditions to drastically tighten with Fed Chair Powell making that clear in his March press conference. This message failed to have a real felt effect on markets last week when the Fed minutes showed that due to the uncertainty presented by Russia-Ukraine we will most likely see a 50bps hike later this year with a 25bps priced in for the May rate decision. As we know the Fed balance sheet and U.S equities have a direct correlation (shown below), so an aggressive tightening by the Fed can only lead U.S equities lower in the aftermath. What does this mean for the dollar? Bets are leaning towards a stronger dollar through the quantitative tightening process. Cable is expected to continue its decline against the dollar with the euro rate trading below the 1.0900 level not seen since March ‘22. Today’s outlook: This week CPI data for the U.S economy is expected to come in above 8% further adding to the pressure the Fed are under to battle this uphill slope. The UK GDP YoY and manufacturing data are set to come in this morning; manufacturing data will give a proxy of how the economy has faired amidst recent conditions.
Apr 11, 2022 · 2 min read
Brace for turbulence
A hawkish tone delivered from the Fed minutes sent U.S equities lower at the close with investors facing fears that the Fed will act more aggressively than anticipated in order to slow down inflation. The Fed intends to reduce the balance sheet by $95 billion per month split between Treasury and MBS securities. Although analysts priced in successive 50bps rate hikes by the Fed, the minutes presented a softer outlook. “Many” Fed officials wanted to see a 50 bps hike but due to the economic uncertainty presented by the ongoing war in Ukraine 25bps would be “appropriate” at this point in time. What does this mean for the dollar and economy? Crystal clear, further strength against all other G7 currency pairs. In the aftermath of the minutes we had spikes in both directions across major pairs, Tuesday’s speech from Gov Brainard seemed to have exhausted the dollar strength to the upside. As the Fed is set to begin QT as early as May, the worry settling in amongst investors is how they will be able to impose enough slack in the labour market without causing unemployment levels to rise too high whilst not pushing the U.S economy into another policy lead recession. The possibility of a “soft landing” seems slimmer by the day; the difference being this inflation is not demand-driven inflation, it is supply-driven inflation so slowing down the economy still fails to solve the root problem. Adding to further uncertainty the U.S and its allies imposed further sanctions on Russia for its military killing Ukrainian civilians. The outlook for the euro looks less and less positive as the war continues; analysts see the euro trading lower against the dollar just above the 1.0850 mark for the foreseeable future.
Apr 7, 2022 · 2 min read
More Sanctions on Russia?
It’s April, so expect a surge in energy bills for the foreseeable future as the war in Ukraine fails to dwindle. As it stands Russia has been hit with soo many sanctions, affecting everything from their manufacturers, finance, private wealth, energy and technology, yet the real kickback seems to be heavier on the West. So the real question is, how many more sanctions can be thrown at Russia? BoE Governor Andrew Bailey held a speech earlier yesterday which failed to make an impact on sterling rates with the main takeaway being his statement that crypto is the new “front line” in criminal scams. The euro has found itself range-bound between 1.09 -1.11 against the dollar, mainly due to the continued attacks in Ukraine where progression in peace talks seems to be the only missing thing. Euro weakness pushed the pound higher, however, major central banks are focused on how they can move in alignment with the Fed’s aggressive rate hike plan to avoid losing ground against the dollar. With expectations pricing in successive 50bps hikes, we can only expect to see the dollar strengthen against counterparties. PMI figures for the UK come out this morning with U.S ISM data later this afternoon. As we know ISM is a leading indicator for the U.S economy and as a result the S&P 500, the greater reading compared to 50 the greater indication of a growing economy.
Apr 5, 2022 · 2 min read
Roll on April
Non-farm payroll fueled traders to bet on a stronger dollar after the BLS reported another month of solid job creation in March. Although the print came in at 431k vs 490k expected, unemployment in the U.S is back to pre-pandemic levels at 3.6% adding to speculation that the Fed might move forward with more aggressive rate hikes. Money markets had little movement over the course of Friday with cable rebounding off recent lows trading at 1.311 and the eurodollar slightly lower at 1.1050. In Europe, CPI figures came above expectations at 7.5% vs 6.6% forecast. President Lagarde uttered the same message to the markets that “you will see higher inflation this year, there is no question about that" whilst also re-affirming that Europe can avoid stagflation which is becoming more unlikely with Russia-Ukraine tensions. Pound-euro is trading above the year low, fueled by strong GDP figures recorded in the Uk Q4 of 2021. Price is holding onto the 1.18 handle. Later on this morning, Gov Andrew Bailey speaks on the state of monetary policy giving room for more speculation on the BoE’s rate hike plans.
Apr 4, 2022 · 1 min read
To start the morning off Q4 GDP YoY for the UK came in at 6.6% vs expectations of 6.5% boosting the pound against both the euro and dollar. Newfound optimism on the Russia-Ukraine ceasefire and peace talks quickly came to a halt after Russia indicated no material progress had been made. U.S equities shaved off gains made yesterday closing lower along with the European market whilst the FTSE was flat. Europe’s strongest economy Germany had a surge in inflation YoY printing 7.3% over March. Traders now bet the ECB will hike its deposit rate from negative 50bps to zero two months earlier than expected with Christine Lagarde stating that “The longer the war lasts, the greater the costs are likely to be”. As a result, we saw the euro gain against the dollar pushing through the 1.1140 level and taking the pound euro to new year lows around 1.1770. Oil and natural gas were back in the green following further attacks in Ukraine and on worries that citizens in Western Europe may be forced to ration fuel. For the dollar, ADP non-farm payroll, which represents private-sector employment, came in above expectations at 455k vs 450k expectations. We saw a surge in employment in the services sector as covid measures ease. To round up Q4 for the U.S GDP data came in at 6.9% vs forecasts of 7.1% expansion, the dollar slipped lower propping cable up to 1.3140. We have initial jobless claims release in the afternoon followed by FOMC member Williams speaking. With non-farm payroll tomorrow that is the piece of data to re-affirm the message of how the U.S labour market is tight and can withstand monetary tightening or if there are any gaps in their plans.
Mar 31, 2022 · 2 min read