Fed Hikes By 75 BPS; BOE Ponders Rake Hike

European shares may have benefited from the ECB’s decision to hold an ad-hoc gathering to discuss market conditions. This was interpreted as positive as at its prior gathering. The bank failed to clearly communicate how they will deal with “fragmentation” risks when they start raising interest rates. 

Reversing course around a week later, the bank said it would direct cash to more indebted nations from debt maturing and work on a new instrument to prevent an excessive divergence in borrowing costs. 

That’s why we saw the euro recovering ground and European equities rebounding. However, the common currency gave back those gains very soon, as ECB President Lagarde said that the ECB’s job is taming inflation and not helping budgets.

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Later in the day, the spotlight turned to the FOMC decision. In line with the market pricing in the aftermath of Friday’s data revealing accelerating inflation, the Committee raised interest rates by 75bps, taking them to the 1.50 – 1.75% range.

The new dot plot was also very close to the path priced in by the financial community. The median dot for 2022 was at 3.4%, up from 1.9%, which implies another 175bps by the end of the year. In other words, the market has been pricing in another triple hike in July and two more doubles after that. For 2023, the median dot was up to 3.8% from 2.8%, suggesting another 40 bps during the year, while in 2024, officials saw the rate at 3.4%, down 40bps.

Initially, the US dollar strengthened on such a hawkish outcome, but it came under selling interest during Chair Powell’s press conference. The Chief said that they delivered a triple hike due to the upside surprise in inflation, but he added that at the next meeting, they might hike either by 50 or 75 bps, depending on incoming data. In our view, this means that a 75bps liftoff is not a deal as the market pricing has been suggesting, and maybe that’s why we saw the US dollar trading south and finishing lower against every other major currency.

However, our view remains the same as ahead of the meeting. We will treat the setback as a corrective move. After all, with such a decision, the Fed remains at the top of the list of the most hawkish major central banks. Thus, we see the case for the greenback to reclaim that lost ground soon, and against some currencies, maybe even today. One of those currencies may be the British pound, for which we see decent chances for another round of selling in the aftermath of today’s BoE decision.

So, speaking about the pound and the BoE, let’s fly to the UK, where expectations are for a quarter-point liftoff. There is some speculation for a 50bps hike, but we see that case as somewhat unlikely. The reason is that since the prior gathering, preliminary GDP data for Q1 revealed a slowdown, and according to the PMIs, the weakness continued in Q2 as well, at a time when inflation remained elevated at +9.0% YoY.

Indeed, on Monday, monthly data revealed a contraction during April. In our view, this adds credence to officials’ concerns over a recession, and although they may continue lifting rates due to very high inflation, their path may be slower than other major central banks, like the Fed and the BoC. Thus, we believe that officials will hike by only 25bps today and repeat their recession warnings, which may weigh on the British pound.

EUR/USD traded lower yesterday after hitting resistance slightly above the 1.0485 barrier. However, the slide was stopped slightly above the 1.0350 zone, marked by the lows of May 12th and 13th. The pair rebounded again. EUR/USD remains well below the downside resistance line drawn from the high of Feb. 10 and below the key resistance zone of 1.0625/50. In our view, this keeps the near-term outlook negative.

Even if the rebound continues for a while, we could see the bears retaking charge from near the 1.0535 barrier, marked by the inside swing low of May 20. This could result in another slide and another test at 1.0350, the break of which will take the pair into territories last tested in 2002, with the next possible support zone being at around 1.0235, marked by the inside swing high of Jul. 14, 2002.

Now, to examine the bullish case, we would like to see a break above the 1.0765/88 zone, which acted as the ceiling of the range the pair traded within from May 23 until Jun. 9. This could also signal the valid break above the aforementioned downside resistance line.

The next stop may be at 1.0845, the break of which could encourage advances towards the high of Apr. 21, at 1.0935. Another break above 1.0935 could carry extensions towards the inside swing low of Apr. 1, at around 1.1025.