The Fed delivers – will the Bank of England???

 Last night the Fed delivered its long-awaited interest rate hike – the first since 2018. Why?

To slow the economy which has powered out of the Covid slump into a world of rocketing inflation, tight labour capacity and low unemployment.

The Fed said of inflation:

"We're not going to let high inflation become entrenched," he said. "The costs of that would be too high." … and then went further, saying that after the 0.25% increase yesterday, they would go ahead with an estimated 6 more increases through the year. This is on top of winding down their asset purchases which have been used to stimulate the US economy.

In the face of increasing yields, we would expect the USD to strengthen – initially it did, but the USD fell back after the initial surge and the Chairman’s comments that inflation WILL pull back to around 4.3% by year end.

• GBP/USD rose above 1.3120 and EUR/USD is back above 1.1000.

What about the UK?

In the UK - where inflation hit 5.5% in January - the Bank of England has already raised rates twice and is expected to do so again on Thursday. The BOE is widely expected to raise the benchmark interest rate by 25 bps from 0.50% to 0.75% in its March monetary policy meeting, marking a lift-off for a third consecutive meeting.

Heading into the decision, the UK’s annualized inflation stands at the highest level in 30 years at 5.5% and is no longer seen peaking at 7.5% in April, as the Ukraine crisis shot energy prices through the roof, with oil prices up roughly 25% so far this year – inflation may drag higher!

However, the key focus will be the Governor’s press conference where he must balance putting his foot on the brakes, and NOT bringing the UK economy to a grinding halt – all this against the backdrop of war in Europe.

• GBP/EUR holding around 1.1920, and whilst GBP/USD is back above 1.3100 the medium term trend has been sharply downward.

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The RedFX Team