Overnight Headlines

*FOMC in-line with expectations, Powell quashes 75bp hike

*US Dollar bruised as Fed hike dashes more hawkish bets

*Equities enjoy a relief rally with largest gains in two years

*Oil steadies before OPEC+ meet, after surging on EU Russian ban

USD fell the most in over a month after the Fed poured cold water on an even larger upcoming rate rise. DXY had hit long-term resistance at 103.82 last week and dropped below the pandemic high at 102.99 during a volatile session. EUR rose nearly 1% and steadied just below the March 2020 low at 1.0636. GBP climbed above 1.26. But sterling is under pressure this morning ahead of the BoE meeting today. It has dropped back to 1.2550. AUD and NZD surged the most, up over 1.5%. The aussie has hung onto gains this morning after its biggest one-day rise in over a decade after the FOMC.

US equities surged higher, in a broad-based rally driven primarily by growth and cyclical names. Tech led the way, with banks and communication services not far behind. The Nasdaq jumped 3.2%, S&P500 was up 3% and the Dow 2.8%. Short-term term bond yields dipped with the 2-year Treasury note falling more than 13bps to 2.63%. Asian shares are firmer while futures point to a better open, especially in Europe.

Market thoughts – Fed dovish, but only at the very margin

As expected, the Fed delivered a half point rate rise, its biggest hike in 22 years. Any remaining fears that the FOMC may go bigger with 75bp moves didn’t come true, although Chair Powell didn’t explicitly rule them out. He did hint that the Fed will hike by 50bp at the “next couple of meetings”. QT starting in June was also announced with the cap increasing to a total of $95bn over three months, so not immediately.

Stock markets treated the slight dovish bias as a big deal with the best day in two years. But this was no game changer. Fed funds futures continue to assume the Fed is going to raise rates almost to 3% before year end, as it did before the historic meeting. Remember at the start of March, rates were still at 0.25%, and will go to 2% by the end of July. We wrote yesterday that there may be a short-term rally in tech and cyclical stocks. The relief advance signals they must have been very worried. But the removal of liquidity is ongoing and expect more turbulence ahead.

Chart of the Day – Sterling struggles to push higher

The Bank of England is expected to deliver a 25bp hike with neutral guidance later today. This dovish tone is due to the potential negative impacts of the energy price shock on the domestic economy. We may get some political uncertainty too, with local elections today and results due on Friday. The market is pricing in 150bps of hikes for the rest of 2022, which means a terminal rate of 2.5%. Many economists see this as overdone with the hit to demand longer lasting than the inflation spike.

EUR/GBP has been trading in a multi-month bearish channel. The middle of last month saw prices hit the lower band and prices have bounced sharply. We are now trading between the 200-day SMA at 0.8440 and the 100-day SMA at 0.8370. The top of the channel offers initial resistance at 0.8470. The March top is 0.8512.