EXPECTED MARKET EVENTS:
Wednesday: FOMC rate decision
Given that the “peak inflation” narrative was shelved on Friday as US CPI data showed still endemic inflationary pressures and the higher rate of long-term inflation expectations in the UoM survey spooked markets even more, I expect markets to maintain risk aversion sentiment at Wednesday’s FOMC event and continue the run for the US Dollar.
Monday’s UK GDP and Tuesday’s UK employment numbers won’t matter too much as the market will simply continue to buy the USD within the FOMC. Same story for the German ZEW survey on Tuesday. I view this data as irrelevant as the market will only focus on positioning for the FOMC on Wednesday.
On Wednesday, the FOMC is expected to rise 50 basis points, bringing the rate to 1.25-1.50%. After Friday’s inflation data, the market started pricing in a 75 basis point chance and we’ve seen such calls come from Barclays and other economists like Summers. Later, the Fed is expected to hike 50 basis points at meetings in July, September and October, then return to a 25 basis point pace from December, taking the rate to 3.00-3.25% d end of the year.
We will also have the Summary of Economic Projections (SEP) which should show a lower revision to the growth rate, a higher revision to the inflation rate and probably a higher revision to the unemployment rate. The dot plot, which shows year-end interest rate forecasts by FOMC participants, will be lifted from the old projections of 1.75-2.00% that we saw in March. They will most likely reflect market expectations of 3.00-3.25%.
Last year in June the Fed surprised with a more hawkish meeting than expected and I have a feeling this will be another one. So the pattern we’ve seen recently, i.e. sell at the FOMC, buy the fact, and resell, can be broken this time and lead to a simple sell in and out of the event. . I really don’t see the Fed maintaining the status quo and certainly not hinting at a pause or anything like Bostic’s infamous comments from the Fed. At this point, a recession is inevitable and the only way out of this inflationary mess, as former Fed Chairman Paul Volcker taught us. In the major currency space, the big winner will be the USD.
On Thursday we will have the SNB and BoE rate decisions and on Friday it will be BoJ time. The SNB is expected to keep interest rates unchanged and adopt a hawkish tone in the face of rising inflationary pressures in Switzerland. The BoE is expected to rise 25 basis points and maintain a hawkish tone signaling further increases ahead. The BoJ on the other hand should keep its dovish tone as inflation in Japan is not as high as in other developed countries and as they have been trying to get inflation for several years it does not seem that a certain overshoot of their 2% objective will force their hand.
As previously stated, the Fed this week will be the big event and overshadow everything else. So buckle up and get ready, because painful times lie ahead…
This article was written by Giuseppe Dellamotta.
This article was written by ForexLive at www.forexlive.com.