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Much has been made of the fact that the western world is experiencing rates of inflation last seen 40 years ago. That’s certainly true of the US, the world’s largest, and most important, economy. There are similarities between the inflation we’re seeing today and that of the 1970s. In both cases oil prices are a major contributor to price pressures. But 1970s inflation was higher than today. It also accelerated over the decade, from around 2% in the 1960s to over 14% by 1980. While energy costs are a factor today, forty years ago a barrel of oil quadrupled in price during the 1973 oil embargo and doubled again in 1979 following the Iranian Revolution. Oil may be over $100 per barrel today, but its rise isn’t a shock like it was back then. We’ve also coped with high oil prices a number of times since the beginning of this century. Selective In the 70s, inflation was everywhere. Today it’s more selective. Some parts of the economy are experiencing rapid price increases (used cars for instance) while others have steady or even falling prices. Much of this has to do with the supply-chain issues, often as a result of pandemic… Read More »Are interest rate hikes the solution to rising prices?

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the “next couple of meetings”. Fed chair Powell communicated that… Read More »Weekly focus: Hiking season

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the “next couple of meetings”. Fed chair Powell communicated that… Read More »Weekly focus: Hiking season

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the “next couple of meetings”. Fed chair Powell communicated that… Read More »Weekly focus: Hiking season

EUR/USD – 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

EUR/USD – 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

Outlook: The major-currency central banks are done for the moment and we’re back to policy rhetoric and watching inflation. Oh, yes, and Fed-bashing. The CME Fed funds tool yesterday, before the Fed decision, had shown a 95% chance of a 75 bp hike. That has now fallen to zero, of course, but accompanied by accusations of the 50 bp we did get was “dovish.” The dovish label applies mainly to the QT methodology—let the paper fall off the balance sheet as it matures—and not the hike per se, but it’s the worst thing that can happen to the Fed—a bloodthirsty market. The 75 bp fantasy came from a single Fed (Bullard) making a one-time comment that he qualified by saying it’s not his preferred base case, but the market ran wild with it like a horse with a bit in his teeth. In contrast, the 50 bp version, also started by Bullard, was quickly picked up a bunch of other Feds , including chief Powell, and widely publicized. Why the market chose a single comment from a single Fed to hang its hat on is a mystery. The market erred. The Fed signals its intentions with great clarity these days. But… Read More »We’re back to policy rhetoric and watching inflation – Oh, yes, and Fed-bashing

The Bank of England (BOE) is set for a 25 bps rate hike on Super Thursday. The no. of dissenters and the BOE’s forward guidance will hold the key. Nothing can stop GBP/USD’s downfall amid aggressive Fed bets and bearish technicals. GBP/USD remains exposed to downside risks, as we progress towards the Bank of England (BOE) ‘Super Thursday’. Another 25 basis points (bps) rate hike remains on the table from the BOE, although it would not be enough to rescue GBP bulls. The UK central bank is set to announce its policy decision at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report. BOE walking a tight rope May’s ‘Super Thursday’ will likely see the BOE delivering another 25 bps interest rate hike, lifting its benchmark rate to 1%, the highest since 2009. This would be the fourth straight rate hike, making it the first time the BOE has tightened that way since 1997. BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT. Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023.… Read More »BOE Preview: A 25 bps rate hike can’t save GBP bulls amid economic gloom

GBP/USD witnessed some short-covering move on Wednesday amid broad-based USD weakness. Fed Chair Powell downplayed the possibility of super-size hikes and weighed heavily on the buck. Expectations for a further tightening by the Fed revived the USD demand and capped the major. Market participants now look forward to the BoE monetary policy decision for a fresh impetus. The GBP/USD pair rallied nearly 200 pips intraday and shot to over a one-week high on Wednesday amid the post-FOMC US dollar downfall. As was widely expected, the US central bank announced the largest interest rate hike since 2000 and the start of quantitative tightening (QT). The Fed raised its benchmark interest rate by 50 bps and said that its near $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August. The reduction would increase to as much as $95 billion per month in September. The USD, however, witnessed a typical ‘buy the rumour, sell the news’ kind of trade after Fed Chair Jerome Powell downplayed expectations for an aggressive tightening path. In the post-meeting press conference, Powell said that the Fed was not actively considering a 75 bps rate hike and that policymakers… Read More »GBP/USD Analysis: Post-FOMC rally fizzles out rather quickly, focus shifts to BoE

Fed Chair Powell has ruled out a 75 bps rate hike, cooling hawkish expectations.  By saying neutral rates are between 2% to 3%, markets see light at the end of the tunnel. A late focus on supply-related inflation puts additional limits to Fed action.  The dollar remains the currency of choice as other central banks are not as aggressive. The Federal Reserve has lifted its leg from the hawkishness pedal – but remains en route to “expeditious” tightening, which is set to keep the dollar bid. After a series of hawkish comments on the impact of inflation – and kicking off the presser by talking directly to the American people – Fed Chair Jerome Powell sent the dollar higher. But, traders want to know what's next. First, Powell then all but ruled out a highly aggressive 75 bps rate hike, providing clear guidance about 50 bps hikes in both June and July. That puts one limit on rates and on dollar strength. Secondly, the Fed Chair said that a neutral rate would be somewhere between 2% to 3%. According to the plan for the next two months, interest rates will reach a range of 1.75% to 2% already in July,… Read More »Fed Quick Analysis: Powell deals three blows to the dollar, but there is no alternative to the king