Headlines

*US dollar hits two-decade high on hawkish Fed outlook, yen falls after BoJ

*Fed raises rates by 75bps again, sees higher terminal rate

*BoE set for a second half-point rate hike in a row

*Hong Kong stocks tumble to decade low on Fed, geopolitical risks

USD rose sharply against its peers after the Fed’s 75bp hike and Powell’s hawkish outlook. The DXY has new highs today at 111.79 after closing at 111.35. GBP extended its decline ahead of the BoE this morning, making a new multi-decade low at 1.1234. The euro broke down through key support at 0.9952 and 0.9863. USD/JPY has pushed beyond the “line in the sand” at 145. AUD and NZD both collapsed making new cycle lows. USD/CAD has surged, touching 1.35 in the current session.

US equities fell close to 2% as the Fed raised rates to the highest level since 2008. Markets whipsawed over the FOMC decision, dot plots and pre- and post- the press conference But, a second down day for the S&P500 took its losses for the year to 20.5%. More than 90% of companies in the broad-based index slid in value. This pushed hundreds of stocks to new 52-week lows. The yield curve inverted further with the two-year yield reaching new highs at 4.12%. Asian stocks are lower with the Nikkei briefly falling below 27,000. Futures are in the red.  

Event Takeaway – 75 the new 25 for the Fed

Fed Chair Powell actually provided little news in terms of policy signals. But the updated economic projections were clearly more hawkish than markets expected. Rates are set to hit 4.6% in 2023, up from 3.8% in June. Forecast rate cuts don’t come until a year later than most thought, in 2024. The Fed will continue hiking until it sees clears signs of growth moderating below potential and the job market cooling.

Frontloading remains with markets pricing another 75bp and a 50bp hike at the last two meetings of the year in November and December. Risks are currently tilted to rates staying higher for longer. This should keep supporting the dollar. Equities look bearish with 3636 and 11,037 key levels in the S&P500 and Nasdaq 100.

Chart of the Day – Plunging pound needs help

As there were no changes to the uber-dovish BoJ policy, the yen has broken through 145. We also note the SEK’s reaction to a surprise 100bp rate hike by the Riksbank. That jumbo hike highlights the fact that higher rates do not necessarily means a stronger currency. It’s a close call between a 50bp or a 75bp rate hike by the BoE today. Most analysts see only a smaller move as policymakers weigh up a looming recession against still high price pressures.

This spells further gloom for sterling which keeps on making new multi-decade lows. Cable is oversold on all long-term indicators. But the only support now is big figures below. We have seen stories about parity in GBP/USD recently, so we think it’s getting closer to the time to consider contrarian trades. But the bearish trend is unrelenting. Can the BoE pull a hawkish surprise out of the policy bag?