Rate hikes expected this week

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MPC expected to deliver 0.25% rate hike

Andrew Bailey is about to start his third year as Governor of the Bank of England, at a time when the Central bank is navigating the most complicated path seen in a while.

Mark Carney, Bailey’s predecessor, cut interest rates four days before he left his post and there was another cut in Bailey’s first week. Since then, Bailey has faced plenty of criticism from the market and former colleagues. This has been for not providing the right amount of advance guidance to the markets and when he called for workers not to ask for a pay rise, to help avoid a wage/prices spiral, which drew criticism for Union Leaders and the Prime Minister alike.?

The MPC is expected to vote for a third consecutive rate hike and as this won’t end the rate tightening cycle, so questions have been asked over why they didn’t start with a fifty-basis point hike - perhaps something the Fed will pay attention to.?

In the market, Sterling is supported around 1.30. We recovered to 1.3090 against the dollar and we open around 1.1890 against the Euro.?

Fed expected to deliver 0.25% rate hike

The Fed meeting is underway and Fed Chairman, Jerome Powell has still not been confirmed in the role for another four years. He is caught up in wranglings over Biden’s nomination for a top regulatory role at the Central Bank.

Sarah Bloom Raskin has called for regulators to more proactively address financial risks related to climate change. Naturally this has angered most Republicans but, crucially, one Democrat has also been riled by this, leaving her with little choice but to withdraw from nomination, which is a bit of a blow for Biden.?

Powell is expected to preside over a 0.25% rate hike. There is still a chance that we’ll see 0.50%, but with the war in Ukraine and the related uncertainty over asset and commodity prices, chances are we'll see them stick with 0.25%.?

It will probably take at least 6mths for the Fed to make a dent in inflation and it could be well into next year before inflation is back close to the Fed’s 2% target.

In the market, some positions are still looking for a 50bp rate hike, so a vote for 25bp could see the dollar fall. Yesterday the dollar index gave back some gains from Monday, pulling back to 98.60.

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Germany facing a recession?

The ZEW report on the German economy suggested a recession is becoming more likely, since the Russian invasion of Ukraine. The German economy is suffering a slowdown since the conflict and there is a virtual collapse of economic expectations. As this is affecting all sectors, there is suggestion that stagflation could be a real possibility.

The ZEW sentiment index fell from 54.3 to -39.3, while the assessment of the current situation fell to -21.4 from -8.1.

The numbers for the wider Eurozone were equally poor, adding to the likelihood of a recession and stagflation for the region.

ECB president Christine Lagarde believes that, despite the conflict, the region will see robust growth this year, but she did temper remarks with a nod to other possible scenarios.

With the US & UK both into rate tightening cycles, the euro is expected to bear the brunt of divergence in G7 monetary policy and there is a genuine belief that EUR/USD could see a low of 1.05. For now, we open around 1.0975.?