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Fed Hikes Rates For the First Time Since 2018

So, it begins the US rate hike cycle has finally started. The US dollar has appreciated ever since the June 16th FOMC meeting a year ago. Now we get to see if the market has fully priced in the rate hike or whether they expect the US dollar to appreciate further on a potential 7 hikes this year.

Market Brief

The Asian equity markets rose strongly following Fed Chair Powell's positive comments last night about the US economy, as well as news that peace talks between Ukraine and the US had progressed and speculation that China's central bank will lower interest rates.

While Japan's Nikkei closed more than 3% higher, Hong Kong's Hang Seng rose more than 5%. However, the bond markets were less optimistic about economic prospects, with parts of the US Treasury yield curve inverting and flattening.

After yesterday's announcement by the US Federal Reserve, the Bank of England (BoE) will announce its monetary policy today at 12:00 GMT. As a result of Russia's invasion of Ukraine, commodity prices have risen sharply since the 24th of February. Although they have fallen back somewhat, the near-term peak for the UK CPI in April is likely to be nearer the 8% level than the 7.25% rate the Bank of England expects.

With the economy performing better than expected in Q1 than the BoE forecast, market analysts are anticipating that the MPC will raise policy rates for the third successive meeting, increasing Bank Rate by 25bp to 0.75%, with the decision likely backed by seven of the nine members of the MPC.

The MPC will follow the other major central banks and will be keeping an eye on how the situation in Ukraine develops, and the potential impact this may have on UK growth and inflation. Yesterday's news from the meeting between PM Johnson and the influential members of OPEC was disappointing in the fact that he was unable to confirm a rise in oil production, which could have gone a long way to reducing global inflation.

The GBPUSD has started the day strong so I am watching the reaction to the 1.3200 level as I am expecting a reversal on less hawkish comments from the Bank of England today. If they were to come out very bullish, I’d rather wait for a pullback to the 1.3100 before making the decision to go long, so that I could put my stop below the recent low.

The US FOMC raised the Fed Funds rate last night for the first time since December 2018. A 25-basis point hike, according to the Fed's projections, could be the first in a series of 7. With each meeting in 2022 "live". The yield curve for US Treasury futures continued to flatten, with the 2-Year contract rising by about 8 basis points and the 30-Year contract declining by about 3 basis points.

In a reversal from yesterday's forecast, CME's FedWatch tool shows a higher likelihood for a 25-basis point hike in May than a 50-basis point hike. Despite all this, the US equity prices rallied into the market close.

The Nasdaq led the way and tagged the 14,000 level and a previous daily low which combined as decent resistance. I am now expecting a pullback to the 13488 before another larger rise in the US equities, as yesterday's close was above the previous fractal high. This break of market structure would have advertised higher prices and will have trapped retail longs, but I think it is the direction we should be heading in.

In the scheduled news today other than the BoE rate decision there are a number of ECB speakers today in Europe at a conference called 'ECB and Its Watchers,' including President Lagarde, Chief Economist Lane, and Executive Board member Schnabel. Inflation for February in the Eurozone is expected to confirm a rise in the annual headline rate to 5.8%.

With the BoE likely to raise rates today I am expecting the EURGBP to sell off towards the 0.83041 level, though the trend is very unclear beyond that. Obviously, a BoE rate hike cycle versus the ECB wait and see should be more bullish for the pound versus the euro.

We'll also have housing activity and industrial production data coming out in the US session.

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