RedFX Update - Increasing rates .. what's happening?
USD: Last night the Fed raised rates by 0.5% (to 4.25% - 4.5% range), which was widely expected. The Central Bank continues to raise rates to battle inflation – which is made easier because the US economy is still printing strong numbers and showing resilience.
The Fed raised its projection for the peak in rates to 5.1% suggesting keeping rates higher for longer. However, the currency did NOT rally on this news because Fed Chair Powell said no one knew if the US economy would tilt into a recession next year or not and added that they could revise the peak rate projection lower if they continued to see soft inflation data.
EUR/USD was at 1.0640 before the meeting, and at 1.0610 after the meeting, now at 1.0720 post-ECB
EUR: The ECB Central Bank raised rates by 0.5% as expected and the EUR gained strength as the announcement stated, “ECB judges that interest rates will still have to rise significantly at a steady pace”. Lagarde re-iterated the ECB commitment to continual 0.5% rises for the foreseeable, pushing the EUR higher.
And "They now see average inflation reaching 8.4% in 2022 before decreasing to 6.3% in 2023, with inflation expected to decline markedly over course of year." We also saw Quantitative Tightening announcements. After years of buying government debt, the ECB will reduce the portfolio of debt by 15bio euro / month and review in Q2 2023 – the market reacted well to this.
Unlike the US and the UK, the ECB cannot start to slow down the pace of rate hikes. The ECB has never moved as aggressively as other Central banks and its slow pace of hikes does not yet have a clear end, as inflation data and expectations remain high.
The extent of growth problems are in these forecasts: “Eurosystem staff projections now see economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025”
EUR/USD was at 1.0610 this morning, back to 1.0720 immediately post-ECB
GBP/EUR fell from 1.1630 to 1.1520
China: I am surprised this hasn’t hurt global stock markets to a greater extent .. Retail Sales contracted at an annual rate of 5.9% in November, missing the market expectation for a decrease of 3.6%. Additionally, Industrial Production expanded by 2.2% in the same period, compared to analysts' estimate of +3.6%. These are BIG MISSES.
Switzerland: The Swiss Central Bank raised rates by 0.5% (to 1%) this morning and said … “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term,”. As the target domestic inflation rate is 0%-2% and the inflation rate in Switzerland is 3% (down from 3.5% in August), the SNB will ned to keep hiking, but the CHF was holding steady – USD/CHF 0.9285 and EUR/CHF at 0.9850.