Daily Market Pulse

Fed hikes 75 bps, the most since ‘94


The greenback reacted tamely to the interest rate hike announcement from the Federal Reserve as policymakers met investors' expectations in an attempt to control inflation. The U.S. dollar index, a major indicator used to assess the performance of the greenback closed out the session 0.14% lower after Jerome Powell announced an increase of 75 bps to its benchmark interest rate, the highest since 1994. Investors took a “buy the rumor sell the fact” kind of approach although the dollar is looking to renew its momentum during the early hours of today's trading session where it has already advanced 0.34% and edged closer to the multi-decade high. However, J Powell dampened the mood when acknowledged that reining in run-away prices may result in a recession and suggested that further aggressive tightening is very likely in the upcoming meeting in July.  


The Euro managed to defend its key support against the dollar, bouncing back from year-to-date lows and capitalizing 0.27% during yesterday's trading session. The European Central Bank pledged to create a tool to curb market stress in the euro area which will also allow policymakers to raise interest rates faster than previously anticipated. Economists believe that the ECB will increase its deposit rate by 25 bps in July and then by 50 bps in September, October and December. The deployment of its anti-fragmentation tools comes earlier than expected which contributes to reducing uncertainty and gives bandwidth to policymakers to consider an extra 50 bps hike than the bank has previously considered. 


The British pound had a volatile session, bouncing back from year to date lows and recording 1.59% against dollar during yesterday trading session. The Bank of England is set to deliver its fifth consecutive interest rate hike today, following yesterday FOMC decision to tighten policy as well in the United States. Market expectations are set at 25 bps increase which would determine the UK benchmark rate at 1.25%, the highest reading since 2009. However, three of the nine-member Monetary policy committee are expected to call for a 50 bps move despite disappointing growth figures in the last month. Policymakers face the risk of stagflation as soaring prices and economic slowdown loom the outlook for the British economy. 


The Japanese Yen snapped eight consecutive sessions of recording losses and bounced back from the lowest price since ‘98. The JPY closed out 1.20% higher against the dollar and momentum sustains during the early hours of today's session advancing 0.91% as market participants reassess market conditions and digest the FOMC announcement. Worth noting that the year-to-date weakness of the Yen comes off the back of divergence in monetary policy, as FED officials tighten policy due to inflation, the BoJ relaxed measures and has combat deflation for decades. The Bank of Japan has to choose between controlling its exchange rate or its interest rate and possibly abandoning its yield curve controls of a 25 bps target for 10- year Japanese government bonds. We expect volatility in JPY to spike in the short term amid Japan's election in July.


The Loonie recovered some lost ground for the first time in six days, following the post-Fed decision, although oil prices failed to extend gains. With the Fed using interest rates to attack inflation, the Bank of Canada might also decide to do the same, as both countries are seeing runaway prices. In early June, BoC raised its rates by 50bps and the bank stated that it “is prepared to act more forcefully if needed” to bring down inflation. Thus, the market is expecting that BoC will hike rates in the bank’s next rate-setting on July 13, taking a similar leap as to what the Fed did. Meanwhile, in the absence of market-moving Canadian data today, oil price dynamics could continue to drive the CAD.


Yesterday, the Mexican peso outperformed among Emerging market currencies, posting 1.61% gains against the greenback, after Fed decided to hike rates by 75bps as expected by the market. Nonetheless, this MXN’s rebound might be a temporary relief for the currency, as the Fed didn’t rule out new hike rates in the near term. Furthermore, the global narrative signals a potential slow growth outlook, as well as additional inflationary pressure. Against this backdrop, the MXN is sensitive to that combination (poor economic growth and inflation mix) and higher volatility could be expected for all EM currencies, including the MXN. 


The Chinese yuan gained 0.19% against the USD on Wednesday after the Fed had signaled super-sized hikes will be unlikely. Even though investors are monitoring the financial conditions in the U.S., the domestic cycle seems to be a more important factor. The local narrative remains unchanged, with Covid and economic slowdown concerns. According to local media, new mass-testing campaigns try to keep lockdowns more localized, however, extended strict measures could lead to a further CNY depreciation. Secondly, the country’s export might be under pressure as the international trade slows further, which could also impact the CNY.


As widely expected, Brazil’s Central Bank made a safe choice by delivering a 50bps hike and signalizing another rate increase of the same size or smaller for the next meeting in August – The selic rate is now at 13.25%. Although the market was expecting a potential end of the tightening cycle, global inflationary conditions added challenges to their plan. Today, local markets are closed due to a national holiday.


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