The question is whether there is likely to be a recession or inflation or both . With hangover of liquidity injections and easier monetray policies of 2010s continuing to dominate the mindset of markets , the markets think this Fed would reverse the course . But Powell is made of sterner stuff - he wants a recession for sure.
The dramatic rise in rates should normally hit the demand in the second half of 2023 with a recession starting in Q3-2023. That said, Fed won`t choose to cut rates immediately at the first sign of weakness and they might stay on hold for the rest of 2023.
Fed`s dot-plot was particularly hawkish, with the median rate projection for the end of 2023 at 5.10% - up from 4.60% in Sept.
Its pertinent to note that the Downshift in rate hikes should not be confused with an imminent end to the hiking cycle.
Bond market`s belief in lower yields hinges on rising recession risk. Yet slowing global growth and rising probabilty of recession- usual response through Fiscal & monetary policies is not expected this time - will negatively impact risk assets and equities , inevitably leading to bouts of USD strength.
USD tracking moves in Treasury yields for now - it spiked higher with yields in a knee-jerk reaction to hawkish Fed , then fell 0.70% from 104.18 to 103.44 as yields reversed lower. A paradigm shift is likely when the market gives up its fascination with yields and trades USD as the cleanest dirty shirt in the town.
ECB meets later today - 50 bp hike for sure -ECB could .persuade markets that it is `serious` about fighting inflation. Could turn out to be sell the news .Support @ 10dma at 1.0560 and break would ease upward pressure.Sell with stop at 1.0700
Xi, Politburo and senior govt officials will meet over the next two days to discuss plans for economic recovery.Nov factory output, retail sales miss expectations.
6.9300-7.0000 consolidation to continue.
EUR/GBP much calmer since Dec began than it was through autumn. So what happens to EUR transpires in GBP .
61.8% Fib of 1.3749-1.0327 sits at 1.2442 & prudent to expect decline below 1.2300 once BOE hikes by 50 bp today .
USDJPY expected to continue with range trades- pulled down by a global recession in making and pushed higher by monetary policy divergence . The factors in the mix include Renewed inbound tourism and M&A and investment activity .Japanese still cautious on getting back into foreign bonds.On other side of ledger, foreign investors big buyers of Japanese stocks.
135.00 - 138.00 core range .
Global recession vs global inflation debate makes an echo here as well. Trade deficit should continue to stay at the new normal $ 25 bio if not climb further into $ 30bio in 2023 ( Higher oil, Lower Global demand). The erosion of carry is becoming structural