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Market Reports 16-06-2022

Published: 16/06/2022 By ECAP

After last nights US FOMC interest rate decision, focus now shifts to this afternoon’s Bank of England meeting. Markets expect the MPC to raise interest rates by another 25 basis points today. Whilst market participants are overwhelmingly in agreement that another rate increase is on the way, there is a great deal of uncertainty as to the future path of policy during the remainder of the year. In light of the ongoing inflation overshoot, analysts expect to see at least a modest hawkish tilt in the MPC’s rhetoric that signals a commitment to additional rate hikes at subsequent meetings. There is also expectations we will see a handful of members to vote in favour of a 50bp hike, which could be bullish for GBP. Overall, a modest hawkish tilt in the MPC’s communications, combined with a handful of votes in favour of a 50 basis point rate hike, would be supportive of the pound, which looks oversold at around the 1.21 level on the dollar.

Earlier on yesterday morning, the European Central Bank surprised the market by announcing that it was holding an emergency meeting in order to discuss the state of the European bond market. While the prospect of additional action designed to ease fragmentation concerns initially buoyed the euro, in the end the ECB announced very little. Attention yesterday evening was squarely on the Federal Reserve that, as expected, raised interest rates by 75 basis points - the largest hike since 1994. The decision to raise rates was unanimous, although one member of the committee did vote in favour of a smaller 50 basis point move. During his press conference, chair Powell indicated that another king-sized 75 basis point move was possible at the next FOMC meeting in July. He did, however, temper expectations somewhat by saying he didn’t expect such large moves to be common. The Fed’s ‘dot plot’ was also shifted higher than we had anticipated. The median dot for year-end was increased to 3.4%, i.e a range between 3.25-3.5% (up from 1.75-2% in March).

In other news, the Swiss National Bank bowed to reality by raising interest rates 50 basis points this morning in an out-of-consensus move. The Swiss franc rallied by around 2% on the euro in response, particularly given the SNB appears open to additional moves at upcoming meetings.