Inflation concerns continue to persist around the globe after the scorching US CPI print last week put even more pressure on the Fed to act aggressively to tame rampant prices pressures. Markets are now pricing in over six interest rate hikes by the Fed for this year and are very close to fully pricing in a 50bp hike by March. Although more centrist Fed officials have cautioned at moving too fast, a well-known hawk has upped the ante by arguing it may be necessary to hold an emergency meeting to get started before.
An intra-meeting rate move is a rare event, though some analysts are citing the time the Fed hiked 100bps in 1979 from 11% to 12% in response to disorderly 12% inflation. The current probability of a rate move in the next three weeks is now certainly non-negligible, but it would be quite a shock when many Fed members are more cautious about faster and bigger rate moves.
Dollar nonplussed (so far) by potential Fed action
The greenback has been relatively unmoved by the commotion in bond markets. Choppy swings were seen in FX immediately after the historic US inflation data, with traders aware that the Fed is still buying assets as part of its bond buying program. But higher than expected, stickier inflation and very tight labour markets point to Fed tightening soon. This should, all things being equal, provide a support base for the dollar, at least against the low yielding currencies who have dovish central banks behind them. Safe haven buying of the dollar could also be a feature if the Ukraine tensions get worse.
The February lows in the dollar index should provide some support, along with the 100-day simple moving average and the long-term upward trendline.
Any more hawkish rhetoric from Fed members this week will be watched closely. This has contrasted somewhat with their ECB counterparts recently, with President Lagarde recently warning against the ECB acting too quickly on rates and hurting activity and jobs.
UK data deluge to inform on BoE hikes
It’s the middle of the month so we get a busy UK data week. The job market has stood up well to the pandemic and unemployment is now virtually where it was pre-virus. Inflation will grab the headlines, but if only because it is heading higher, to 7% in April due to the upcoming utility price hikes.
The Bank of England appears on track to hike rates again at both its March and May meetings with EUR/GBP potentially targeting 0.83 if the data comes in stronger than expected.