EUR/USD - 1.0540 Despite euro's resumption of decline from May's 1.0786 peak to a 1-month bottom of 1.0360 in post-FOMC Wednesday, subsequent rebound and then yesterday's rally above 1.0507 (now support) to 1.0601 on broad-based usd's selloff signals choppy swings above May's 5-year 1.0350 trough would continue but 1.0642 should cap upside and yield retreat. On the downside, only a daily close below 1.0507 would indicate aforesaid recovery over and risk weakness towards 1.0452. Data to be released on Friday New Zealand manufacturing PMI, Japan interest rate decision. Italy trade balance, EU HICP. Canada producer prices, U.S. industrial production, capacity utilization, manufacturing output and leading index.  

Equity markets are experiencing another day of pain on Thursday as central banks continue to signal a willingness to sacrifice the economy in order to get inflation under control. Central banks are full of surprises this week whether it's the Fed accepting a recession as the cost of price stability, the SNB raising rates by 50 basis points out of nowhere, the ECB holding an emergency meeting or the BoE seemingly crossing its fingers and hoping 11% inflation goes away on its own. What will the BoJ bring after a busy week in the bond markets? The SNB hike was arguably the most surprising of the lot, with the consensus before being that they would stand pat and resist further strengthening the currency which has been boosted by safe-haven flows. Not only did it not, but it also hiked beyond all expectations and appears to have warmed to the idea of a strong franc. I'd be more amazed at the shift if the SNB under Thomas Jordan didn't have a history of sudden u-turns without warning. Perhaps the most surprising thing about the BoE today was how underwhelming the policy response was. At a time when the central bank announced that inflation is now expected to peak above 11% in October, it also raised interest rates by a measly 25 basis points and didn't show a particular willingness to accelerate the tightening to combat those price pressures. Of course, every economy is different and the MPC is clearly of the view that inflation will come down naturally over time, referencing the fact that energy and core goods account for around 80% of the inflation overshoot. It seems quite the gamble though and one that could prove disastrous if it doesn't pay off but once more, markets and the central bank are taking drastically different views on the outlook for rates. The BoE appears ready to slow things down while markets are expecting multiple super-sized hikes in the coming months. Central banks haven't fared too well against the markets this year and it's hard to make a case for the BoE this time around. Another central bank that's having a hard time is the BoJ which has been forced to fiercely defend its yield curve control policy tool this week. It's swimming against a vicious tide and conditions are becoming more treacherous by the day. Governor Kuroda has stood firm against any suggestion the policy should be tweaked but could the BoJ have one more surprise in store for us? IEA offers a bleak outlook for crude Oil prices are relatively flat on Thursday, after once again edging lower earlier in the session. Crude has been paring gains in recent days after a huge run higher over the previous month but prices are still extremely high. Risks remain tilted to the upside even as recession risks take some of the heat out of the market. The good news just keeps coming in the oil market, with the IEA reporting today that it expects record global oil demand next year paired with supply struggling to keep pace as Russia is forced to shut in more wells and other producers are constrained by capacity. In other words, the market will remain extremely tight and prices high. A recession may ridiculously be the only hope for balance in the market and lower prices. Although refining capacity won't even hit pre-Covid levels next year which will continue to boost prices at the pump. ​ Gold recovery may not have legs A volatile week in gold has seen it break through the bottom of the recent range only to recover a little around $1,800. A stronger dollar remains a major headwind for the yellow metal and in these conditions, it's hard to imagine it falling out of favour. Yields are continuing to rise and central banks are hiking aggressively in a desperate attempt to rein in inflation. It doesn't bode well for gold even in these risk-averse markets. Another blow on the way for bitcoin? Bitcoin HODLers must be getting a little nervous at this point despite their unwavering belief in the future of the cryptocurrency. The short-term outlook is pretty bleak for bitcoin and even recent headlines haven't been in its favour. With central banks everywhere raising rates and risk appetite taking a beating on a regular basis, the bullish case is getting weaker by the day. And a break of $20,000 could be the next major blow.

The BOE is likely to hike the key rate by another 25 bps to 1.25% on Thursday. A surprise 50 bps hike cannot be ruled out if the BOE prioritizes inflation control. GBP/USD has room to recover but it depends on the bank’s tightening guidance. GBP/USD could confirm a bullish reversal from two-year troughs should the Bank of England (BOE) surprise markets by announcing a 50 basis point interest rate hike on Thursday at 11:00 GMT.   BOE could take global central banks’ lead Until a day ago, a 50 bps rate hike by the UK central bank could not be imagined. With the US Federal Reserve (Fed), however, now seen delivering a 75 bps rate hike at its June policy meeting, seeing the BOE going large on the rate lift-off is not unthinkable. Adding to this, the Reserve Bank of Australia (RBA) announced a bigger-than-expected 50 bps hike earlier this month and the Reserve Bank of New Zealand (RBNZ) also hiked by a half-point. Markets have priced in a roughly 40% chance of a double-dose lift-off at the June MPC meeting. According to the Bloomberg survey of economists, three of the BOE’s nine officials are expected to vote for a 50 bps hike, with the majority backing a 25 basis point move. Meanwhile, the latest Reuters poll of economists showed that the BOE is set to deliver a quarter-point hike on June 16 to 1.25%, its fifth consecutive rate rise. Two more are expected this year to 1.75%, which means rate increases in August and November. I believe the main reason the BOE may opt for a  bigger rate hike is to show that it prioritizes inflation. The central bank needs to show a much stronger response to control inflation, which is likely to peak at around 10% by October. The inflation expectations remain high, in the face of the UK Finance Minister Rishi Sunak’s £15 billion cost-of-living package, calling for a quick monetary policy response before the inflation problem gets out of hand. Also, the fact that the public’s net satisfaction with the BOE’s control of inflation is at the lowest level ever could compel it to deal with the inflation issue head-on. Concerns over the UK growth cannot be ruled out, as the economy heads towards the inevitable, with two back-to-back monthly negative GDP prints. Therefore, the rate hike voting composition will hold the key alongside the central bank’s outlook on the economic growth and further policy tightening. In absence of Governor Andrew Bailey’s press conference, the central bank’s forward guidance will be closely examined. Trading GBP/USD with the BOE It could be a Thursday turnaround for GBP/USD bulls, as oversold conditions on the daily chart could collaborate with the hawkish 50 bps surprise from the BOE. Therefore, an extended recovery towards 1.2300 could be in the offing on a 50 bps lift-off. However, if the central bank chooses to state a ‘gradual pace of tightening in the coming meetings or highlights growth risks, a further upside in the pair could be capped. GBP/USD could witness a ‘sell the fact’ trading should the BOE hike the rates by the expected 25 bps. GBP could also take a beating if the MPC voting composition shows a majority voting in favor of a smaller increase. In such a case, the pair could head back towards its multi-month lows below 1.1950. An outrightly dovish outcome could imply that the BOE is more concerned about the growing risks of recession even though inflation is broadening out. Meanwhile, cable’s reaction to the BOE announcements could also depend on the fallout of the expected hawkish Fed decision, which could have a significant impact on the market sentiment, as well as, the US dollar valuations.

The Federal Reserve has raised rates by 75 bps points, a substantial move. Firm commitments signal the Fed prioritizes crushing inflation and is ready to assume the consequences. The dollar is set to continue its gradual advance, building on monetary policy divergence.  Confidence in the Fed may lower long-term yields, supporting gold.  Is the Federal Reserve serious enough about fighting inflation? That is the main question for markets, and my answer is yes. The decision only provides a nod to the Fed's other mandate of full employment, and undoubtedly focuses on crushing prices. The words "strongly committed" are a significant upgrade to the Fed's language.  Could the Fed have done more? Yes, Powell is not Paul Volcker, who destroyed the US economy in the 1980s to change Americans' inflation mindset. However, the moves have undoubtedly conveyed a clear message to markets.  For the dollar, the reaction is straightforward monetary policy divergence favors the greenback, which could continue advancing against all its peers. Moreover, other central banks may be forced to act in response to the Fed. The first tests are for the SNB, BOE and BOJ, all set to make announcements in the next 36 hours.  For gold, the place to watch is 10-year yields. If my analysis is correct and the Fed convinces markets of its determination to fight inflation, it would send long-term yields lower – perhaps even forecasting an outright recession. For XAU/USD, a fall now could be a buying opportunity.  What about stocks? Markets prefer lower rates and cheap money. Fast rate hikes are adverse, especially to tech stocks but also to broader markets. However, the hope that the lower terminal rate could help shares recover – markets fall in the elevator shaft and climb up the stairs. Stocks have suffered and may begin looking for a bottom. 

EUR/USD - 1.0428 Although euro's selloff from Thur's post-ECB 1.0773 high to a near 1-month bottom at 1.0398 in Asia Tue due to active safe-haven USD's buying on global stock market rout and rally in US yields suggests re-test of May's 5-year trough at 1.0350 would be seen, subsequent rebound would yield range trading and below would extend towards 1.0320. On the upside, only a daily close above 1.0507 would indicate a temporary trough is in place and risk stronger retracement towards 1.0535, then 1.0550. Data to be released on Wednesday New Zealand current account, Japan machinery orders, tertiary industry activities, Australia consumer sentiment, China industrial output, retail sales. Germany wholesale price index, Swiss producer/import price, France CPI, EU trade balance, industrial production. U.S. MBA mortgage application, NY Fed manufacturing, import prices, export prices, retail sales, business inventories, NAHB housing market index, Fed interest rate decision and Canada housing starts.

With the Federal Reserve expected to raise interest rates for the third time this year, the U.S. dollar is hovering near multi-year and in the case of USD/JPY, multi-decade highs. The greenback retreated slightly on the eve of FOMC but don’t be mistaken, the Federal Reserve will be very hawkish on Wednesday. A half point increase has been completely discounted and in the last 24 hours, expectations for a 75bp hike soared to 96% according to the CME’s Fed Watch tool.  Is Inflation Alarming Enough to Risk Recession? A 75bp hike would be a technically and psychologically big move - the largest one time hike for the Fed since 1994. How the U.S. dollar reacts will depend entirely on whether the central bank opts for 50bp or 75bp move. For the Fed, the question is whether inflation conditions are alarming enough for a drastic move that would inevitably crush the equity markets and heighten the risk of recession next year.   The short answer is YES.  Consumer prices hit a 40 year high in May and the pain will continue as producer prices rise 10.8% year over year. Short and long term inflation expectations continued to climb according to the June University of Michigan consumer sentiment index. Both the Federal Reserve and President Biden have made fighting inflation a top priority. To put this into perspective, according to Moody’s Analytics, the typical U.S. household is spending about $460 more each month on the same basket of goods and services compared to last year. With oil prices hitting a 3 month high today, there are no signs of price pressures letting up.  The Fed could get away with raising rates by 75bp tomorrow because the labor market remains strong with the unemployment rate hovering near its lowest rate since the 1960s.   The problem is that rising prices and rising interest rates means a rising risk of recession. According to a Financial Times poll taken last week (before expectations for 75bp rate hike surged) 70% of leading economists expect the U.S. economy to fall into recession in 2023.  Their concern is that the speed and velocity of the Federal Reserve’s rate hikes would lead to a deeper contraction in spending and growth. Retail sales are due for release tomorrow and a soft release would be a daunting reminder of the risks ahead. The recent drop in the personal savings rate to its lowest level since 2008 tells us that Americans are already dipping into their savings to cope with rising prices. Unfortunately according to 40% of the economists surveyed, 2.8% rates this year (which would be 50bp hikes in June, July and September) would not be enough to bring prices down. Traders are getting ahead of the game by pricing in 4% rates by the middle of next year.   How to Trade FOMC Aside from the Federal Reserve’s decision on interest rates, economic projections and their dot plot will be released tomorrow. We are looking for an increase in their CPI forecast along with a decrease in their GDP projections. Minimally, the dot plot should show their Federal funds rate projection rising from 1.9% in 2022 to at least 2.6%. The 2023 forecast should rise from 2.8% to at least 3.5%.    For Wednesday’s FOMC announcement, there are two catalysts for big moves in currencies, equities and Treasuries. The first being the 2pm rate decision which will be accompanied by the economic forecasts and dot plot. The dot plot will provide some guidance on future policy path but the extent of the Federal Reserve’s hawkishness may not truly be known until Fed Chairman Powell delivers his press conference 30 minutes later.  When it comes to trading FOMC, there is usually a knee jerk reaction to the 2pm announcement and this month the reaction will be significant. Then a retracement followed by consolidation about 10 to 15 minutes after the initial move before a real more durable move about 15 minutes after Fed Chairman Powell delivers his prepared comments. For the dollar and USD/JPY in particular, 150 is a far target but an achievable one if the Fed raises by 75bp and suggests 50bp of tightening at the next 2 to 3 meetings. However if they only raise rates by 50bp instead of 75bp, even if they intend to continue tightening consistently over the next few months, the dollar should sell off in disappointment with the better trade being long EUR/USD than short USD/JPY.  However, with a clear aggressive path of tightening still ahead, the dollar’s pullback will be short-lived.