Each week there is usually a focal point the markets prepare for. The only difference this month is that we’re also having to navigate the high volatility caused by war. If we keep it to simple economics, this rate hike today has been flagged many months ago so all the probabilities of 25bps should be priced in now. The question is, how Hawkish will the Fed sound in the forward guidance?
Financial markets will be watching today's US monetary update closely as other central banks have recently had to comment on the added difficulty for monetary policy decisions since the start of the Ukrainian crisis. They were already worried about rapidly rising inflation even before the recent escalation. With higher oil and gas prices, inflation appears to be set to rise further, but recessionary risks have also increased. It appears that the US Federal Reserve is mindful of the rising probabilities around a recession but more concerned about being behind the curve in dealing with inflation.
Brent is at an inflection point. Does it come back into the range, or does it bounce from here? With talks progressing in the Ukraine/Russia situation energy markets and precious metals have begun to decline from their recent highs.
As a result, US interest rates are increasingly likely to rise at today's Fed policy update for the first time since 2018. The CME Fed watch tool shows that there is even still a chance they raise by 50bps which would shock the market into a repricing. My thinking is that the current expectations of a 25bps rise are all priced in, so we're waiting on the Q&A press conference after the announcement.
Additionally, the Fed may provide more details on its plans to wind down its QE program. The February US retail sales report is likely to show modest growth following January's big increase. Consumers may switch to buying services not included in the retail sales measure as Covid concerns begin to subside in the West.
UK gilt yields may follow US 10-year yields today, but they will also pay attention to tomorrow's Bank of England update. On Tuesday, US 10-year yields were at their highest level since mid-2019. But still far below the 3% which I can remember market analysts saying would tank the economy back in late 2018. In currency markets, sterling appreciated modestly against the US dollar yesterday but slipped versus the euro.
Asian equities are up this morning with Chinese stocks rebounding strongly after yesterday's sharp declines. Today is the first meaningful rise in the Hang Seng since the start of February. Russian and Ukrainian peace talks appear set to continue today, but there are contrasting signals from both sides. Zelensky said he believes that Russia's demands are becoming more realistic, but the Russian president seemed less optimistic that the Ukrainians are fully committed to the talks. Zelensky's olive branch was the admission that Ukraine would not be allowed to enter NATO.
Whether the dove finds safe ground is yet to be seen but the oil markets have sold off as have the precious metals markets which signal to me that we're definitely heading in the right direction. Still no end game in sight, so markets will be reacting to headline news as well as the scheduled news today.
I am going to watch to see which way the GBPUSD is pushed tonight by the FOMC and then by the MPC tomorrow. A break lower than the 1.30100 by the end of day Thursday and I see the GBPUSD declining further along the Fib extension to 1.26190. If Cable can close the week above the 1.3200 there is a chance of a move all the way back up to the 1.33167 or possibly the 1.35350.
The ActivTrader sentiment indicator shows that the majority of traders in GBPUSD are trying to buy this 1.30100 level, so maybe there is more of a chance we go lower. It would be the path of least resistance and this sentiment indicator has proven to be a great contrarian tool in the past. But like I said, better to wait until after the Banks of England’s decision tomorrow.