Europe European markets have ended the week very much on a downswing as yesterday’s big sell-off in the US has rippled over into today’s price action, pulling markets into negative territory for the week, with the DAX set to finish lower for the fifth week in a row. The FTSE 100 has also had a disappointing week, sliding to a one week low, with the energy sector saving it from a worse fate with both BP and Shell finishing the week very much on the front foot, after their strong numbers earlier this week. Rate hike talk has dominated this week, with the Fed raising rates by 50bps, with more to come, the Bank of England hiking rates by 25bps, and now several ECB officials have started raising the prospect of following suit in July, in comments made today in response to concerns over higher prices to help anchor future inflation expectations. These comments appear to have accelerated today’s weakness as the economic outlook starts to darken.    Today’s price action has been dominated by weakness in consumer discretionary on concerns over weak demand as higher prices prompt a decline in consumer spending. Travel and leisure have also been caught up in today’s weakness with IAG the worst faller on the FTSE100. The recent updates from US airlines painted a much more optimistic picture for US travel with Delta, United Airlines, and American Airlines saying they expect to return to profit this year, as business travel and leisure travel started to return to more normal levels of activity. Of course, IAG faces slightly different challenges in that its domestic market is more fragmented in the form of its various different brands. Nonetheless, when the airline reported a €2.9bn loss at the end of last year, it said that while it didn’t expect to be profitable in Q1, that it should return to profit from Q2, assuming no further restrictions. Of course, the Russian invasion of Ukraine has put a spanner in the works, various IT issues, which have damaged its brand appeal, along with the various lockdowns and restrictions that have affected its Asia and China routes. Today’s Q1 numbers have seen passenger capacity come in line with expectations at 65%, with an expectation of 80% for Q2, 85% for Q3 and 90% for Q4, with North Atlantic routes expected to be close to full capacity by Q3.   Revenues for Q1 were €3.44bn, slightly above expectations, but below Q4’s €3.5bn, while operating losses narrowed to €754m, which was higher than expected, and appears to be weighing on the share price today, although the airline has maintained it expects to return to operating profit from here on in. The number of passengers carried was 14.38m, above estimates of 14m. On a similar leisure theme Holiday Inn owner IHG has reported revenue per room (RevPAR) rose 61% vs last year and is now back at 82% of 2019 levels. The Greater China region has proven to be a drag in March due to lockdown restrictions. By region, occupancy rates were at 60% in the US, 50% in EMEAA and 36% in Greater China, while the US outlook looks the most promising in terms of increased pricing power, with rates in the US business 4% ahead of 2019 levels. Adidas shares have fallen back sharply after the sportswear company cut its full year operating margins from 10.5% to 9.4%, due to the slowdown seen in its China business. For Q1 operating profit fell 38% year on year to €437m, although this was above expectations while revenue came in at €5.3bn. The company also downgraded its expectations for the rest of the year.  This has prompted weakness in the likes of JD Sports. Dutch lender ING has seen its shares fall back after incurring significant costs on its exposure to Russian loans. The bank said it was taking €987m in loan loss provisions, as it posted a net profit for Q1 of €429m. Revenues came in at €4.6bn, slightly above expectations. US US markets have continued where they left off yesterday, opening lower despite a pretty good non-farm payrolls report, with both the Nasdaq 100 and S&P500 both breaking below key support levels of 12,700 and 4,100 respectively, raising the prospect of further heavy losses in the short to medium term. 428k new jobs were added in April, while the March figure was revised lower to 428k, so a nice bit of symmetry there. The unemployment rate remained steady at 3.6%, while the participation rate unexpectedly fell to 62.2% which is a little surprising. Average hourly earnings remained steady at 5.5% which suggests that for all the concern about a tight labour market and 11.2m vacancies, wage inflation remains subdued. On the earnings front Under Armour has continued the theme of sports apparel makers warning about the outlook, after Adidas warning this morning, by saying that it expects to see a...

Summary United States: 'Til the Medicine Takes The latest economic data suggest supply challenges worsened in April. Delivery times lengthened, and while employers continued to add jobs at a solid pace, the supply of labor weakened. Price pressure has remained elevated as a result. The FOMC raised its federal funds rate 50 bps this week at the conclusion of its policy meeting, and the incoming data for April reinforce our expectation for another 50 bp hike in June. Next week: NFIB Small Business Optimism (Tues), CPI (Wed), U. of Mich. Consumer Sentiment (Fri) International: Reserve Bank of Australia Delivers Initial Rate Hike, BoE & BCB Continue Tightening Faced with concerns about high inflation, multiple central banks around the world tightened monetary policy this week. Notably, the Reserve Bank of Australia (RBA) raised its Cash Rate by 25 bps to 0.35%, citing a resilient economy with inflation that has accelerated faster and higher than previously expected, as well as progress toward full employment and wage growth. The Bank of England and Brazilian Central Bank also delivered rate hikes this week. Next week: Mexico CPI/Banxico Rate Decision (Mon/Thu), U.K. GDP (Thu), Russia CPI (Fri) Interest Rate Watch: The First 50 bps Rate Hike from the FOMC in 22 Years At the conclusion of its meeting this week, the FOMC increased the target range for the federal funds rate by 50 bps to 0.75%-1.00%. The move was widely anticipated by financial market participants, but that does not diminish the fact that it was the first 50 bps rate hike from the Federal Reserve in 22 years. Credit Market Insights: Monetary Policy Is Impacting Mortgages, Including Refinancing Freddie Mac reported on Thursday that 30-year mortgage rates reached 5.27%, 17 bps higher than the previous week and the highest level since 2009. After more than a decade of sub-5.0% mortgage rates, the past few months of expectation setting and quantitative tightening have already affected the mortgage market. Topic of the Week: Shining a Light on the Rising Economic Potential of AAPI Small Business In commemoration of AAPI Heritage Month and Small Business Month, we highlighted some economic contributions of the Asian American and Pacific Islander community with a focus on AAPI-owned small businesses in a recent report. Download the full report

Much has been made of the fact that the western world is experiencing rates of inflation last seen 40 years ago. That’s certainly true of the US, the world’s largest, and most important, economy. There are similarities between the inflation we’re seeing today and that of the 1970s. In both cases oil prices are a major contributor to price pressures. But 1970s inflation was higher than today. It also accelerated over the decade, from around 2% in the 1960s to over 14% by 1980. While energy costs are a factor today, forty years ago a barrel of oil quadrupled in price during the 1973 oil embargo and doubled again in 1979 following the Iranian Revolution. Oil may be over $100 per barrel today, but its rise isn’t a shock like it was back then. We’ve also coped with high oil prices a number of times since the beginning of this century. Selective In the 70s, inflation was everywhere. Today it’s more selective. Some parts of the economy are experiencing rapid price increases (used cars for instance) while others have steady or even falling prices. Much of this has to do with the supply-chain issues, often as a result of pandemic lockdowns, something that central banks can’t control. Prices of goods and services should settle down as we get back to normality. Wages are rising, but this is due to skill shortages rather than unionised workers demanding inflation-busting pay rises. Also, while the US Federal Reserve was caught out by thinking inflation was ‘transitory’, they are finally adjusting rates up. Hopefully, they will do this in a measured fashion to ensure a soft landing. Back then, it took a decade and the appointment of Paul Volker as Fed Chairman before interest rates were pushed high enough to help drive down inflation. There was also a different mindset. The idea of a ‘zero’ let alone a ‘negative interest rate policy’ was unthinkable. As was the prospect of central banks expanding their balance sheets and intervening in the markets by buying up bonds and other financial assets. Back then we had interest rates that were higher than the rate of inflation. That’s something that is unthinkable now. With US CPI inflation around 8.5% year-on-year, and interest rates now at 1.0%, we need the Fed Funds up above inflation just for savers to maintain their purchasing power. Instead, the US currently has a negative interest rate of 7.5% (8.50 minus 1.00). Messed up There’s a growing feeling that the Fed has messed up – again. It has spent years trying to push inflation to its 2% target rate, as measured by Core PCE. Ever since the Great Financial Crisis of 2008/9 they’ve kept monetary stimulus loose. But while the standard measures such as CPI failed to pick up inflationary pressures, hard evidence of rising prices was everywhere. Soaring equity markets, bonds, real estate, artworks, jewellery, classic cars all testified to the fact that money was just too cheap. When they tried to tighten, and it took the Fed from December 2015 to December 2018 to raise rates from 0.25% to 2.50%, stock markets slumped, causing the Fed to reverse course. There was additional monetary stimulus in response to the pandemic. Not only that, but we saw an extraordinarily large dollop of fiscal stimulus too. This turbocharged the US economy coming out of lockdown and finally created inflation. At the beginning, central bankers insisted it was transitory and so had an excuse not to raise rates. Now they have been proved wrong and are being forced to take action. But will it work? Will rate hikes calm the inflation that central bankers and policymakers created in the first place? Is this the right response, or just a public relations exercise in being seen to do something? Is it a desperate attempt to put a lid on inflationary pressures which are already putting a huge strain on households? Inflation is terrible for savers and those on a fixed income. But it also destroys debt, and there’s more debt in the world than there has been in the whole of history. That’s why central bankers could prove to be a lot less hawkish than many analysts currently think. Growth is already slowing. The Fed could have acted sooner, but it missed its opportunity to raise rates modestly and engineer a soft landing. But should they be too aggressive over the next three months or so, they risk crashing the market and causing a recession. That’s why for all the fury and bluster about inflation, central banks may prove to be less proactive than expected when it comes to taking action. 

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus

We saw significant market jitters this week with VIX volatility starting off at a two month high. The lack of a hawkish message from the Federal Reserve (Fed) turned things around for a while only for US equities to take a big plunge on Thursday as investors largely consider Fed to be behind the curve. In London, a trading error caused a flash crash in Swedish stocks of 8% on Monday, which immediately spread to the other Nordic and European bourses. Markets quickly normalised again, though. This was also the week where 10-year US treasuries traded through the 3%-level for the first time since 2018. Oil prices bounced to the highest level since March on the back of EU plans to phase out imports of Russian oil and US looking to start re-filling its strategic reserves. Adding further to inflation pressures, refined oil products have increased more in price than crude since the war broke out as Russia is a big exporter here. The Fed largely did what was expected of them this week, as they hiked rates by 50bp and hinted that they will hike by 50bp again at the "next couple of meetings". Fed chair Powell communicated that the Fed is not "actively considering" a larger 75bp rate hike although he did not rule it out. We are still just at the beginning of the hiking cycle and we see risks skewed towards more aggressive tightening. Several other central banks also hiked rates this week. Bank of England did 25bp as widely expected but removed the risk of steep rate hikes for now, as the BoE remains concerned about the growth outlook, which translated into a weaker pound. We also got hikes from the Reserve Bank of Australia and surprise 75bp hikes from both the National Bank of Poland and the Czech National Bank. The former was significantly less than priced by markets and the latter was more. This week’s economic data predominantly indicates European resilience to the war in Ukraine so far. Unemployment declined to an all-time low in March and the service sector showed a nice rebound amid reopening in April. On the other hand, the manufacturing sector is slowing down, German industrial orders and output are declining and producer price inflation increased further in March, indicating more headwinds for consumers going forward. We saw high inflation starting to take its toll on Euro area retail sales, which declined in March. Chinese PMI’s plunged in April on the back of the Shanghai lockdown, a warning for the global manufacturing sector, which typically lags China by a few months. On a positive note, the outbreak seems increasingly under control. Next week, we will look out for Russian victory day. We expect Russian president Putin will escalate his rhetoric against the West. The market reaction is uncertain and will depend on the possibility of a Russian attack on other countries. We will also follow discussions on the EU’s sixth sanctions package and if agreement for a Russian oil embargo is found. In the US, April CPI data could very well mark the peak in inflation. We will focus on mom moves, though, which are still too high for the Fed to feel really comfortable. Download The Full Weekly Focus

EUR/USD - 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

EUR/USD - 1.0542 Despite euro's rally to a 8-day high in Asia Thursday, subsequent selloff to as low as 1.0493 in New York on renewed broad-based rally in usd suggests recovery from last Thursday's 5-year bottom at 1.0472 has possibly ended and below 1.0472 would extend recent downtrend to 1.0405/10. On the upside, only a daily close above 1.0578/83 would prolongs choppy swings and risks stronger retracement to 1.0603, break, 1.0630/40. Data to be released on Friday Australia AIG services index, Japan Tokyo CPI. Swiss unemployment rate, U.K. Halifax house prices, Markit construction PMI, Germany industrial output, France non-farm payrolls, Italy retail sales. U.S. Non-farm payrolls, private payrolls, unemployment rate, average earnings, Canada employment change, unemployment rate and Ivey PMI.

Outlook: The major-currency central banks are done for the moment and we’re back to policy rhetoric and watching inflation. Oh, yes, and Fed-bashing. The CME Fed funds tool yesterday, before the Fed decision, had shown a 95% chance of a 75 bp hike. That has now fallen to zero, of course, but accompanied by accusations of the 50 bp we did get was “dovish.” The dovish label applies mainly to the QT methodology—let the paper fall off the balance sheet as it matures—and not the hike per se, but it’s the worst thing that can happen to the Fed—a bloodthirsty market. The 75 bp fantasy came from a single Fed (Bullard) making a one-time comment that he qualified by saying it’s not his preferred base case, but the market ran wild with it like a horse with a bit in his teeth. In contrast, the 50 bp version, also started by Bullard, was quickly picked up a bunch of other Feds , including chief Powell, and widely publicized. Why the market chose a single comment from a single Fed to hang its hat on is a mystery. The market erred. The Fed signals its intentions with great clarity these days. But it’s true that the Fed erred in not acknowledging the spread of the fringe into the mainstream expectation. Obviously the Fed is not dovish if it’s hiking by 50 bp and another 50 bp likely in June, but equities and commodities went up and the dollar went down, so obviously the market is right. Market prices are always right in the sense that they are evidence of action, not words. It doesn’t mean the analysis behind the action is right, but it may mean “confidence and trust in institutions” is not as strong as it could and should be in a crisis. Especially when the other big independent institution, the Supreme Court, is losing the public trust by gobs with every passing minute. Accusations of a true-color dovishness are not only in fringey publications, but made the front page of the Financial Times. It’s absurd to say the Fed is dovish after the first 50 bp hike in 20 years, but it looks wimpy in the context of 75 having been expected. There was nothing wrong in the Fed’s transparency—it has been signaling 50 bp and it delivered 50 bp. The market pumped itself up on a false idea and is now throwing a temper tantrum because it was wrong. The ironic part is that if Powell had NOT said the Fed is declining to consider 75 bp and let the market go on thinking 75 is somehow on the table, the reaction might have been saner and tamer. It’s ridiculous to say the high-falutin’ finance and economics types at the Fed should be heeding the silly fantasies of some of the crowd, but wait, it’s their job to know what the market expects and the CME Fed funds tool is hardly social media gumpf. Criticism is also upon the plan of letting maturing assets run off the balance sheet instead of actually selling any. For longer-tenor assets, this will take forever—well, a long time.  The Fed has $1.92 trillion in assets of 5-10 years. A third “shortcoming” is Powell admitting the Fed doesn’t know what the neutral rate should be. Aiming for transparency, something the market has agitated for years (in part because of Greenspan’s deliberate obfuscation), Powell said the Fed can’t identify the neutral rate “with any precision.” The FT reminds us that  “Fed officials broadly view neutral to be about 2 and 3 per cent, when inflation is at 2 per cent, but some economists argue it is now much higher — potentially as much as 5 per cent — given the magnitude of price pressures.” “Despite that challenge, Powell wavered little from his earlier optimism that the Fed can achieve a ‘soft or softish landing’, not least because of the strength of household and corporate balance sheets as well as the historically tight labour market.” It looks like the market was out to get Powell no matter what he said, but to be fair, the Fed appears somewhat clueless about the depth and width of criticism of its policies. This is not to say the Fed is wrong, just out of touch with a seemingly fairly fat tail. This is often the case, as we have observed over the years, with the phrase “behind the curve” having entered the general lexicon. The question now is whether the dovish label gets removed over time and if so, how much time. The rapid response in asset pricing was likely driven by a minority that was quickly joined by a majority that was just jumping on the bandwagon and not necessarily buying into the dovish story. Let’s not forget...

The Bank of England (BOE) is set for a 25 bps rate hike on Super Thursday. The no. of dissenters and the BOE’s forward guidance will hold the key. Nothing can stop GBP/USD’s downfall amid aggressive Fed bets and bearish technicals. GBP/USD remains exposed to downside risks, as we progress towards the Bank of England (BOE) ‘Super Thursday’. Another 25 basis points (bps) rate hike remains on the table from the BOE, although it would not be enough to rescue GBP bulls. The UK central bank is set to announce its policy decision at 11:00 GMT, which will be accompanied by the meeting’s minutes and inflation report. BOE walking a tight rope May’s ‘Super Thursday’ will likely see the BOE delivering another 25 bps interest rate hike, lifting its benchmark rate to 1%, the highest since 2009. This would be the fourth straight rate hike, making it the first time the BOE has tightened that way since 1997. BOE Governor Andrew Bailey is scheduled to hold a press conference following the publication of the Monetary Policy Report (MPR) at 11:30 GMT. Markets have priced in a 25 bps lift-off, predicting the bank rate to rise to 1.5% by early 2023. Heading into another rate hike this week, the outlook for the UK economy continues to be dour while the central bank remains committed to tackling the inflation monster. Although fourth quarter UK GDP was revised upwards to 1.3% QoQ, a protracted Russian invasion of Ukraine and China’s coronavirus lockdown-driven global supply chain crisis is spelling recession fears for the British economy. Bailey and Co. are in a tough spot yet again, as the inflation rate holds at a 30-year high of 7% in March, driven by a sharp increase in petrol and diesel costs. In a balancing act at its March policy meeting, the BOE’s cautiousness on the future tightening path disappointed the hawks and since then GBP/USD has lost roughly 1000 pips to hit 21-month lows just above 1.2400. Governor Bailey said last month, "We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession.” GBP/USD probable scenarios The central bank’s forward guidance will hold the key at this meeting, while markets will also focus on the number of dissenters. Deputy Governor Jon Cunliffe was the only dissenter last time but if two or more members join him against a rate rise, then it would mean an outright dovish hike. GBP/USD could see a fresh downside leg, with a breach of the 1.2400 level well on the cards. On the other hand, if policymakers voice concerns over inflation broadening out even while acknowledging the material risks to growth to the downside, it could be seen as a shift to a hawkish pivot. Further, any hints of a potential quantitative tightening (QT) by active sales of gilt yields in the upcoming months could be seen as hawkish. In such a case, cable’s recovery could gather steam, with the pair looking for a bullish reversal towards the weekly highs of 1.2600 en-route to 1.3000. But traders should bear in mind that the BOE is not the only factor impacting the pair today, as the expected hawkish Fed decision will also play a crucial role in GBP/USD’s price action ahead of the BOE event. 

GBP/USD witnessed some short-covering move on Wednesday amid broad-based USD weakness. Fed Chair Powell downplayed the possibility of super-size hikes and weighed heavily on the buck. Expectations for a further tightening by the Fed revived the USD demand and capped the major. Market participants now look forward to the BoE monetary policy decision for a fresh impetus. The GBP/USD pair rallied nearly 200 pips intraday and shot to over a one-week high on Wednesday amid the post-FOMC US dollar downfall. As was widely expected, the US central bank announced the largest interest rate hike since 2000 and the start of quantitative tightening (QT). The Fed raised its benchmark interest rate by 50 bps and said that its near $9 trillion balance sheet would be allowed to decline by $47.5 billion per month in June, July and August. The reduction would increase to as much as $95 billion per month in September. The USD, however, witnessed a typical ‘buy the rumour, sell the news’ kind of trade after Fed Chair Jerome Powell downplayed expectations for an aggressive tightening path. In the post-meeting press conference, Powell said that the Fed was not actively considering a 75 bps rate hike and that policymakers were ready to approve similar-sized rate hikes at upcoming meetings. The comments sent the US Treasury bond yields lower, which, along with the risk-on impulse, weighed on the safe-haven greenback and prompted some short-covering around the GBP/USD pair. That said, the markets are still pricing in further 200 bps rate hikes for the rest of 2022. This, in turn, helped limit deeper losses for the buck and capped the major, rather attracted fresh selling during the Asian session on Thursday. Spot prices slipped back below mid-1.2500s as the focus now shifts to the Bank of England (BoE) meeting. The UK central bank looks poised to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has leapt to a 30-year high. Meanwhile, the overnight index swaps markets predict that the BoE will hike six more times in 2022, raising prospects for disappointment. It is worth recalling that the MPC voted 8-1 to hike rates by 25 bps in March. Any sign of widening dissents in favour of keeping the interest rate unchanged would be seen as a dovish tilt and suggest that the rate hike cycle could be nearing a pause. This would be enough to prompt aggressive selling around the British pound and set the stage for the resumption of the GBP/USD pair's recent bearish trend. Heading into the key event risk, traders might take cues from the release of the final UK Services PMI. Meanwhile, the US economic docket features the usual Weekly Initial Jobless Claims, though is likely to be overshadowed by the post-BoE volatility. Apart from this, some repositioning trade ahead of the closely-watched US monthly jobs report - NFP on Friday - should allow traders to grab some meaningful opportunities around the GBP/USD pair. Technical outlook From a technical perspective, the pair's inability to capitalize on the overnight strong move up and the emergence of fresh selling suggests that the recent downtrend might still be far from over. That said, any subsequent decline is more likely to find decent support near the 1.2500 psychological mark, below which spot prices could slide back to the overnight swing low, around the 1.2470-1.2465 region. Bearish traders could eventually aim to challenge the YTD low, around the 1.2410 area. The latter should act as a pivotal point, which if broken decisively will be seen as a fresh trigger for bearish traders. The pair would then accelerate the fall towards intermediate support near the 1.2345 region en-route the 1.2300 mark before eventually dropping to June 2020 low, around mid-1.2200s. On the flip side, the 1.2600 round-figure mark might now cap the immediate upside ahead of the post-FOMC swing high, around the 1.2635-1.2640 region. The next relevant hurdle is pegged near the 1.2670 area, or the 38.2% Fibonacci retracement level of the recent slump witnessed over the past two weeks or so. A convincing breakthrough the latter would suggest that the pair has formed a near-term bottom and set the stage for additional gains.

Fed Chair Powell has ruled out a 75 bps rate hike, cooling hawkish expectations.  By saying neutral rates are between 2% to 3%, markets see light at the end of the tunnel. A late focus on supply-related inflation puts additional limits to Fed action.  The dollar remains the currency of choice as other central banks are not as aggressive. The Federal Reserve has lifted its leg from the hawkishness pedal – but remains en route to "expeditious" tightening, which is set to keep the dollar bid. After a series of hawkish comments on the impact of inflation – and kicking off the presser by talking directly to the American people – Fed Chair Jerome Powell sent the dollar higher. But, traders want to know what's next. First, Powell then all but ruled out a highly aggressive 75 bps rate hike, providing clear guidance about 50 bps hikes in both June and July. That puts one limit on rates and on dollar strength. Secondly, the Fed Chair said that a neutral rate would be somewhere between 2% to 3%. According to the plan for the next two months, interest rates will reach a range of 1.75% to 2% already in July, so the following moves are constrained as well. Talking heads on financial media discussed levels as high as 3.50%, so that comment is another dollar downer.  Third, despite all the rhetoric about inflation as a big issue, Powell stressed that some factors are beyond the Fed's control. Central banks impact demand, not supply, he retorted and then went on to elaborate on external factors. China's covid-related lockdowns and Russia's war in Ukraine weigh on supply and push prices higher. That Fed cannot fight that. These three limits explain the blow to the dollar, but what's next? I think the greenback remains king, as the Fed is tightening faster than other central banks. Moreover, those external issues boost the dollar as a safe haven.  All in all, we had a dollar-negative "buy the rumor, sell the fact," then a dollar rise in response to a determined view against inflation, and finally a downfall when Powell set limits to the Fed's hawkishness. And now, I expect the broader dollar uptrend is set to resume.