Market Update 4th May 2022

Good morning, all!?

It’s decision day for the Fed as the hotly expected first rate hike from the US central bank will be announced later tonight (GMT), alongside the Monetary Policy Statement and FOMC Press Conference.

Responding directly off this, the key pairs have remained in similar margins they traded in yesterday. Despite being a dense day on the calendar across the pond, investors are due to ignore both Employment Rate and PMI data building up to the decision to come later. It is expected that the Fed will be hawkish in their approach. By now a 50bps hike, the highest since 2000, has now been priced in by investors. With the decision expected, alongside plans to begin trimming the balance sheet by 95 billion dollars a month from June onwards, the impact of such aggressive tightening may be minimal. Since the beginning of March, the DXY is up nearly 7%, indicating that is has indeed been priced in as early as then.

?Two alternative outcomes however would shake the market. Any ‘less hawkish’ (the new dovish), outlook could see USD selling pressure increase and as a result the key counterparts advance on the greenback. Any caution regarding hikes to come later in the year, or acknowledgement of the loss of growth momentum because of first COVID,?now the Ukrainian invasion, alongside a tip of the hat to a worsening global economic outlook could be damaging. This would aid EURUSD, which although up on yesterdays close of play, remains focused on what Powell has to say later. It looks to have formed a support above 1.05 today. Considering the risk sentiment, it could do with a boost from a Fed surprise.?

?The alternative, talks of a 75bps rate hike to come in following meetings to tame inflation will force key pairs lower, giving the dollar more momentum. Such hawkishness would be a blow to the cable. Ongoing Brexit headlines and the BoE’s own policy dilemmas have made it a tricky time for GBPUSD investors. It still sits around 1.25 and it could work out that even if the Fed approach with caution, such trepidation regarding the BoE on Thursday could soften the blow for the Dollar.

?A fascinating day lies ahead, where will the line be drawn? And WHY? It’s all to come.?