- FOMC hikes rates 0.25%, predicts six more hikes in 2022
- Bank of England to raise interest rates 0.25% today
- US dollar retreats as risk sentiment improves
USDCAD Snapshot: open 1.2654-58, overnight range-1.2654-1.2697, close 1.2676, WTI open $99.04, Gold open $1,941.18
The Canadian dollar rallied despite the FOMC raising interest rates by 0.25% and predicting another six rate hikes in 2022 followed by four more increases in 2023. A mere six months ago, Fed Chair Jerome Powell and his colleagues were unconcerned with rising inflation and the Summary of Economic Projects forecasted just one rate hike in 2022. Apparently, inflation is robust not transient.
The FOMC statement and Powell’s press conference were more hawkish than expected. Mr Powell suggested that rate increases were not limited to 0.25% increments. He said, “If we think it will be appropriate to move at a quicker pace then we will do so and that is certainly a possibility as we move through the year.” The Fed also plans to begin quantitative tightening (QE), perhaps as soon as May, which will exacerbate rate increases.
St Louis Fed President James Bullard was not happy with the 0.25% increase. He wanted a 0.50% hike.
The market reaction to the hawkish Fed outlook doesn’t make a whole lot of sense. After an initial sell-off, the S&P 500 index recouped all its pre-meeting losses and closed with a 2.4% gain, despite the US 10-year Treasury yield spiking to 2.20%. Commodity prices rallied and the US dollar retreated.
Arguably, the market moves had more to do with profit-taking as the reality of rapidly rising interest rates should lead to lower equity prices and a firmer greenback.
EURUSD traders were unfazed by the hawkish Fed. Prices rallied from 1.0950 around FOMC announcement time to 1.1065 in Europe before they slid to 1.1040 in early NY.
GBPUSD tracked EURUSD higher, on the back of improved risk sentiment. The Bank of England is expected to hike rates by 0.25% to 0.75%. A decisive break above 1.3200 will extend gains to 1.3300.
USDJPY spiked to 119.08 following the hawkish Fed announcement and the jump in Treasury yields. Prices drifted lower overnight, and USDJPY is near the bottom of its 118.50-119.02 range. The BoJ monetary policy meeting is expected to be a non-event.
AUDUSD rallied from an FOMC low of 0.7214 to 0.7372 in early NY trading, powered by a mix of positive risk sentiment, rising commodity prices, and a stellar employment report.
There is a ton of US data today, including weekly jobless claims, Philadelphia Fed Manufacturing Index, and Housing Starts, but the reports won’t matter in the wake of the FOMC statement.
