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Powell delivers a 75 bps rate hike

USD

The Federal Reserve announced yesterday a 75 bps interest rate hike, highlighting that a similar hike was possible again and rejecting speculation that the U.S economy is in recession. The latest interest rate decision sets the funds rate in a range between 2.25% and 2.5%, a level considered by most economists as “neutral” where the economy neither speeds up nor slows down. Forecasts in mid-June showed officials expected to raise rates to about 3.4% this year and extend until 3.8% in 2023. Chairman Powell flagged that these estimates are the best current guide of where the Fed was heading, although market participants should expect less guidance in future interest rate adjustments from policymakers. Finally, the Chairman recognized that spending and production readings have softened recently but pointed out that the job market remains robust and the unemployment rate low, highlighting that demand is still strong and the economy is still on track to grow this year. The comments from Powell underpinned stocks and improved the risk sentiment, weighing over the greenback 0.63% during yesterday's trading session as the 75 bps hike was already priced in.

EUR

The common currency appreciated 0.82% despite Fed officials announcing a 75 bps interest rate hike and rejected speculation that the U.S. economy is diving into recession. The comments from the chairman induced a risk on sentiment underpinning equity markets and risky assets globally.  Yet, today the block's economic docket remains busy with early economic sentiment figures for July while the german inflation reading will be closely monitored for potential rate adjustments of ECB policymakers in September. However, economists believe that inflation figures in Germany should have softened from 7.6% to 7.4%. Additionally, growth figures in the U.S. will be the main event of the day as participants assess the risks of a recession.

GBP

Cable capitalized 1.08% following the monetary policy tightening announcement from the Federal Reserve amid a broader improvement in risk sentiment. This morning, the Sterling consolidated gains on the expectation of slower U.S. rate rises in the coming months and jitters of recession. However, cable risk remains on the downside as U.K. recession risks remain significantly high and we could expect choppy volatility in the coming weeks. The U.K. Consumer spending is being hammered by soaring inflation and growth has slowed to a crawl while the Bank of England is embarking on a rapid tightening cycle and we expect the next meeting to take place in the first week of August. 

JPY

The Yen gained momentum after the tightening announcement from the U.S, policymakers shifted expectations of coming rate adjustments. The Yen is one of the best-performing currencies, appreciating 0.8% during the early hours of Today's session, in addition to closing 0.26% higher yesterday. Hedge funds are covering short bets from of the biggest global macro trades of the year and market participants are starting to liquidate their long USDJPY positions. This could alleviate pressure from BoJ to sustain its dovish policy in a global rate tightening environment.

CAD

The Canadian dollar advanced 0.48% against its US counterpart on Wednesday, after Fed delivers a 75bps hike, in line with expectations. Canadian traders also priced in the fact that the Fed will slow down the pace of interest rate hikes following its latest outsized increase. At the same time, Canadian bond yields were lower across a more deeply inverted yield curve, tracking the move in U.S. Treasuries. Looking forward, market players are already expecting that the Bank of Canada will increase its benchmark rate by 75bps at the next September decision and it would be the end of the hiking cycle. Today, traders will be watching the CFIB Business Barometer and Payroll Employment Change figures.

MXN

The Mexicano peso closed 0.25% higher against the USD, in tandem with other emerging market currencies, after Fed raised the benchmark lending rate 75 basis points to a range of 2.25% to 2.5% - already priced in and lower than 100bps expected. Investors are still closely monitoring the carry trade between the MXN and USD - in the short term, the MXN will remain backed by higher interest rate differentials. Another driver is the price of WTI crude oil, given Mexico is a huge producer of energy. The current WTI price of around $98 per barrel helps the peso sustain its value even with additional rate increases by Fed.

CNY

The yuan also gained against the greenback yesterday, amid Fed rate hikes and commodity prices recovering. However, the CNY´s movements throughout July have been timid - so far, the yuan has drifted lower this month. The domestic housing crisis and Covid headlines clouding the growth outlook for china might explain the bearish positioning. Today, Joe Biden and Xi Jinping are expected to talk, according to local media, amid tensions over Taiwan and Russia's invasion of Ukraine. Looking at macro forces, the CNY´s outlook appears clouded. 

BRL

Emerging-market currencies advanced, with the Brazilian Real leading gains in Latam, after the Fed vowed to slow the pace of interest-rate hikes at some point. In addition, soft commodities prices also recovered, in particular soybean and corn prices, providing support to the BRL. Overall, the BRL may continue to trade at current levels as the Fed remains hawkish and European assets remain shaky as the energy crisis prevails, ensuring the Dollar's bullish trend. Looking ahead, IBGE (Instituto Brasileiro de Geografia e Estatistica, in Portuguese) will release inflation figures for July, which is expected to show monthly inflation eased.

 

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