Daily Market Outlook, June 16, 2022

Overnight Headlines

Initial market reaction to the US Federal Reserve’s decision late yesterday to raise interest rates by 75bp – the largest since 1994 – was volatile. The rate increase was larger than the 50bp signalled last month, but stronger CPI inflation data and rising inflation expectations compelled policymakers towards a bolder move. Chair Powell signalled that another 75bp rise next month is on the table, which would take the upper bound of the fed funds rate to 2.5%. Bonds and equities moved modestly higher after the announcement, while the US dollar declined slightly. Asian equity markets started trading on the front foot but gains were pared overnight.

The Bank of England will announce its decision on interest rates at midday. With UK CPI inflation running at 9.0%, Bank Rate is anticipated to rise for a fifth consecutive meeting, with expectations for a 25bp increase today to 1.25%. That outcome is fully discounted by financial markets which are currently pricing in about a 40% probability of a larger 50bp increase. It is probable that there will be a vote split, highlighting Monetary Policy Committee members’ differing views on the balance of inflation and growth risks.

The government’s recent fiscal package to support households adds to the case for further tightening. It will be interesting to see members’ reaction to this and whether it impacts on their ‘forward guidance’ about the likelihood of further rate moves. Some on the MPC may vote for a 50bp rise today. However, the labour market data released earlier this week showing, among other things, a rise in the unemployment rate may tilt the odds towards a 25bp rise. Markets currently anticipate interest rates will rise to at least 2.75% by the year-end, which is 100bp above the consensus forecast of economists.

Attention will also be on ECB speakers today. That follows an impromptu meeting of the Governing Council yesterday in response to intra-euro government bond yield spreads widening sharply in anticipation of the end of QE and higher policy interest rates. The ECB pledged apply ‘flexibility’ in reinvesting redemptions from its asset purchases under PEPP (Pandemic Emergency Purchase Programme). As that may not be sufficient to counter widening spreads, the ECB also said it will accelerate the completion of a new ‘anti-fragmentation instrument’.

In the US, data releases include housing starts and building permits, as well as weekly jobless claims and the regional Philadelphia Fed manufacturing survey. Overnight, the Bank of Japan is expected to leave its interest rates unchanged, but it will be interesting to see to what extent it will continue to resist policy tightening seen in other major central banks.

EURUSD Bias: Bearish below 1.07 Bullish above

GBPUSD Bias: Bearish below 1.26 Bullish above.

BoE rate decision due today, with double-digit inflation weighing on the economy
IGD believes UK food inflation is set to reach 15% this summer
Rising rates, soaring inflation, and negative GDP suggest a long hot summer
Decent bids are seen on the first test below pivotal 1.20
Momentum & Daily VWAP remain negatively oriented
Offers and stops towards 1.2215
Bids are seen back to 1.21/1.2090 stops below

USDJPY Bias: Bullish above 127 Bearish below

AUDUSD Bias: Bullish above .7200 Bearish below

AUD/USD sell the rumor buy the fact relief rally post FOMC
AUD/JPY bids helped the AUD/USD test weekly projected range resistance .7030’s
AUD/USD traded back towards 0.70 post better than expected jobs data
AUD/USD rally post-FOMC sees bears back on the offer
Offers seen towards.7100, support sited towards 0.6850 and current cycle low at 0.6829