May 5, 2022

“The US dollar is set to retain most of its recent Fed-tightening induced gains for at least the next six months, as the much-anticipated 50 basis point rate hike leaves the door open to further increases in the coming months.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The Federal Reserve raised its benchmark policy rate by half a percentage point for the first time since 2000 and sent a strong signal that it intended to increase it by the same amount at the next two meetings. At the end of its two-day policy meeting yesterday, the Federal Open Market Committee lifted the target range of the federal funds rate to a range of 0.75 per cent to 1 per cent. The rate increases came as the US central bank embraces a more aggressive approach to tackling high inflation. Top officials have backed a much more rapid withdrawal of the pandemic-era stimulus in light of one of the tightest labour markets in history. Fed chair Jay Powell said: “There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.” However, Jerome Powell downplayed the likelihood of a 75-point move, saying it’s not something being “actively” mulled.

The Bank of England is expected to increase its base interest rate to the highest level in 13 years in a bid to tackle inflation. It is predicted to rise to 1% amid soaring food, energy and fuel prices that saw inflation hit a 30-year high of 7% in March. The base rate is the interest rate that the Bank of England charges commercial banks for loans and currently stands at 0.75%. The change, due to be announced today, would mean higher mortgage payments for more than two million home owners with variable rate mortgages. It would also increase the cost of other loans, cutting what consumers have available to spend elsewhere. The bank is also tipped to raise its forecast for inflation, which it previously said would hit 8% in April and grow further this autumn. The cost-of-living crisis is set to worsen in October, when another increase in the energy cap is expected.

GBP

Sterling is weaker than most major currencies in the early morning trade. UK ports are demanding compensation from the British government after a delay in implementing post-Brexit border checks by 18 months left them with empty high-tech facilities that risk becoming multimillion pound “white elephants.” Rising mortgage interest rates are squeezing homebuyer budgets as the cost-of-living crisis threatens to put the brakes on two years of frenzied activity and soaring prices in the UK property market. UK ministers are shelving plans to ensure that workers keep their tips, despite having first promised to do six years ago, in a move that has angered trade unions. Britain’s accounting, management consulting and PR firms have been told to cut ties with Russian clients as part of a government ban on professional services exports to the country.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. As it ratchets up sanctions on Russia’s economy, the European Commission has proposed kicking the country’s biggest bank off the Swift global payments system that facilitates trillions of dollars’ worth of trade every day. Meanwhile, Hungary is holding up an EU plan to ban almost all imports of Russian oil, saying it would block the move, which requires unanimity among the bloc’s 27 member states.
France’s left-wing parties have agreed to team up in June’s parliamentary elections, setting aside major differences on Europe, foreign policy, and government spending in an attempt to counter newly re-elected president Emmanuel Macron. German factory orders fell 4.7% month on month in March, a much steeper drop than forecast, accelerating from a revised 0.8% decline in the previous month.

USD

The dollar is well bid against most major currencies overnight. Major US banks including JPMorgan Chase & Co, Wells Fargo Bank and Citibank have raised their prime rate to 4%, effective Thursday. President Joe Biden called the ‘MAGA crowd’ the ‘most extreme political organization in American history’ in a full-throated attack on Republicans and their ‘ultra-MAGA’ agenda in a speech from the White House yesterday. US companies added far fewer jobs than expected in April, suggesting the tightest labour market in decades has made it difficult for businesses to fill a record number of open positions, according to the ADP National Employment Report released yesterday. Companies added 247,000 jobs in April, sharply missing the 395,000 gain that had predicted. It also marked a big decline from March, when private employers added an upwardly revised 479,000 jobs.

Markets

Stocks and bonds rose amid a bout of investor relief after the Federal Reserve raised interest rates as expected to tackle high inflation while countering fears of super-sized hikes. Asian shares pushed higher Thursday, US futures steadied, and European contracts added over 2% following the S&P 500 index’s biggest daily advance since 2020. The dollar remained lower after retreating in the Fed’s slipstream. Australian debt surged in the wake of a pronounced slump in shorter-maturity Treasury yields as traders scaled back bets on aggressive monetary tightening. The US central bank will also allow its holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, stepping up over three months to $95 billion. Climbs in oil and wheat underlined the risks. Crude hit $108 a barrel on a European Union plan to ban Russian barrels over the next six months.

Main Economic Data/Central Banks/Government (All Times CET)

8:30 a.m.: Switzerland April CPI
8:45 a.m.: France March industrial, manufacturing production
9:00 a.m.: Hungary one-week deposit rate
9:00 a.m.: Turkey April CPI; PPI
10:00 a.m.: Norway central bank decision
10:30 a.m.: U.K. April S&P Global/CIPS PMI
12:00 p.m.: Bank of Portugal Governor presents May Economic Bulletin
12:30 p.m.: ECB’s Lane speaks
1:00 p.m.: BOE rate decision
1:30 p.m.: BOE’s Bailey speaks
2:30 p.m.: Czech rate decision
2:30 p.m.: U.S. weekly jobless claims
6:00 p.m.: ECB’s Holzmann speaks
Poland rate decision
OPEC+ convenes virtually for a regular meeting

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