Overnight Headlines

*Post-Fed relief rally cools as US Treasuries retreat

*Hawkish BoE likely to keep pace of rate rises constant

*SNB set to lay groundwork for rate hikes, July move seen

*DXY has rebounded from post-FOMC declines, JPY lags G10 FX

US equities closed higher in volatile trading. The Dow snapped a five-day losing streak. The S&P500 rose 1.4% and the Nasdaq gained 2.5%. Beaten-up tech shares led the market’s bounce as sector performance reversed with cyclical growth outperforming defensive names. Asian stocks are mostly positive and followed suit to the gains on Wall Street. Futures are modestly in the red.

USD eased following the Fed’s move to address surging inflation. The DXY made new cycle highs at 105.78 before closing around 105.16. EUR recovered to near 1.0450 after getting close to 1.0350. GBP rebounded from this week’s low at 1.1933. It is currently trading around the May bottom at 1.2155. USD/JPY slipped below 134 before bouncing back above. AUD gained over 2% and is back trading around 0.70. USD/CAD fell below 1.29 from near 1.30.

Market Thoughts – The Fed’s “dovish hike” of 75bp

So, the FOMC went through with its hastily agreed bigger rate hike last night. This took the Fed Funds target rate to a range of 1.50-1.75%, the highest level since just before the pandemic began. The “dot plot” signalled a year-end rate at 3.40%. This was an upward revision of 1.5ppts from the March estimate. Even the least hawkish FOMC member has the rate above 3% at the end of 2022.

The more aggressive stance comes at an economic cost. Growth forecasts were cut, with the 2022 estimate now at 1.7%, down from 2.8% in March. Inflation forecasts rose to 5.2% this year for PCE, up from 4.3%. But core CPI is seen at 4.3%, just a 0.2ppt rise from previous projections.

The press conference was initially interpreted as dovish. Chair Powell indicated that the Fed is not going to make a string of 75bp rate hikes. He pointed to a 50bp or 75bp move in July. But the FOMC is “strongly committed” to get inflation back to 2%. This means the risk of going faster and deeper into restrictive territory is a hard landing. In the near-term, the dollar should continue to trade near its highs for the year.

Chart of the Day –EUR/GBP pulls back

The Bank of England is likely to meet market expectations of another 25bp hike today, its fifth straight increase. Up to three MPC members could vote for a larger hike. That would mean a similar 6-3 vote outcome seen in May. Inflation risks are widening, the labour market remains way too hot and fiscal policy may help avert a consumer-led recession. Market pricing continues to run well ahead of the bank’s own rhetoric. Though policymakers may signal further tightening is needed, the MPC will probably not micro-manage expectations. This is partly because it hasn’t made up its own mind.

We note the ECB’s emergency meeting yesterday which gave off a strong political signal even if no exact details on a new fragmentation tool. The bank has bought itself some time and we will watch for numerous ECB speakers today.

EUR/GBP broke out to the upside of a long-term bear channel at the start of May. It retested that on a few occasions in the middle of last month. But prices tracked above 0.85 before exploding higher earlier this week. A new high at 0.8721 was posted yesterday before an equally explosive selloff reversed those gains. First support is 0.8512 and resistance at those highs.