Rate hikes likely to come “thick and fast”

Remember Jerome Powell? He is the new Fed Chairman. He is a lawyer and was supposed to bring a lawyer’s forensic and pragmatic approach to monetary policy. Following The minutes, released last evening it seems we may have misjudged Mr Powell. The Fed is more upbeat about inflation that it has been of late there were no dissenting voices concerning inflation breaking above the Fed’s 2% target.

The core expectation remains at three hikes this year, but we have received advance notice that that could move to four quite easily. The surprise brought about by the significant rise in wage inflation seems to have brought about this new found hawkish attitude

The dollar index has risen above 90.00 and looks set to test the very strong resistance around 90.50. Since the FX market is in something of a state of flux with drivers emerging and falling away with alarming regularity, it wouldn’t be a surprise if the resistance were breached or at least severely tested. With the Euro falling like a stone having reached and failed to breach its medium-term target, a continued recovery for the dollar index shouldn’t be ruled out.

BoE talks up UK economy

The Governor, his deputy and the Chief Economist of the Bank of England appeared before MP’s yesterday to give their annual report on the economy and the steps the MPC has taken and continues to take to curb inflation.

I have always felt it was a little glib to simply blame inflation on the weakness of the pound without trying to deal with it. Originally, there was a rate hike being discussed for, I believe, last June but inflation data which was released the day before showed a fall from 3% to 2.9%. The brave decision would have been to hike anyway, and the effect would have been felt over a longer period. Then, November’s hike would have been more acceptable since it was part of a cohesive plan.

Haldane’s comments were very supportive for the economy saying that he believed rates could rise at a faster pace than markets are expecting and that the UK and global economies are starting to move ahead. He will have had advance warning todays latest GDP estimate, so an upside surprise is a possibility.

Governor Carney agreed with Haldane although he preferred a little caution despite saying that he believed that he markets have “got the message” from the Bank’s comments.

Euro fall providing the ECB with breathing space.

Mario Draghi, the ECB President must be a relieved man. As the common currency broke through the 1.2520 resistance level, it looked for all the world like it was going to at least remain at, or close to that level. The subsequent fall as the dollar has recovered will have provided a little “wiggle room” to Sr. Draghi and since the next ECB policy meeting isn’t until the end of April, he will have a much clearer view of the economy by then.

It has been surprising just how easily previous perceived support and resistance levels have been broken but it is unclear is that is due to an increase or decrease in volumes.

It has been difficult for short (and medium) term traders to make money as the market has turned very quickly recently. This was very well illustrated by the reaction of Eur/Usd following the FOMC minutes it rallied on clear false break only to then collapse and test the strong support at 1.2280.

Since Central Banks have been in the background over several years as their hands have been tied, they have sprung to the forefront of market drivers although there is a marked lack of proactivity driven by uncertainty particularly in the Eurozone.

 

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