Fed hikes by 50 basis points.

The Federal Reserve increased interest rates by 50 basis points to 4.50% from 4.00% which was in line with consensus forecasts and the vote was unanimous.

The statement reiterated that the Fed was highly attentive to inflation risks while indicators pointed to modest spending and production growth.

The statement repeated that interest rates are expected to increase further, but added that the committee will take note of lags associated with monetary policy.

The latest forecasts of interest rates from individual committee members, the 2023 median estimate on the Fed Funds rate was increased to 5.1% from 4.6% previously with the 2024 estimate increased to 4.1% from 3.9%.

The forecasts were close to expectations with markets pricing in a peak of 4.9% from 4.8%.

Chair Powell reiterated that he anticipates that further rate increases will be necessary and that the labour market remains out of balance and very constrained despite some decline in vacancies with an underlying labour shortage.

Powell added that the Fed still sees inflation risks skewed to the upside and again warned that it would be a mistake to ease policy too quickly.

According to Powell, the estimate of peak rates could move up or down depending on the data with the February decision based on economic and financial conditions.

Powell was confident that inflation would fall significantly next year and, although he poured cold water on the possibility of rate cuts next year, he did add that policy is getting close to being restrictive enough.

Treasuries dipped in immediate response to the Fed policy statement, but regained ground with the 10-year yield unable to hold above 3.50%.

The latest Chinese data was weaker than expected with the increase in industrial production held to 2.2% in the year to November from 5.0% previously and below expectations of 3.4%. There was a 5.9% slide in retail sales from 0.5% previously and all releases were well below expectations. The raft of weaker than expected data undermined risk appetite.

The dollar posted gains in an immediate response to the Fed policy decision, but failed to hold the gains with very choppy trading during Powell’s press conference.

Weaker risk appetite provided some dollar protection on Thursday.

The latest data recorded an Australian employment increase of 64,000 compared with expectations of 19,000 with unemployment held at 3.4%.

The Bank of England, ECB and Swiss National Bank are all expected to increase interest rates by 50 basis points to 3.50% and 2.50%. Assuming market expectations are met, forward guidance will be crucial for currency moves.

Narrow ranges prevailed ahead of the Fed policy decision. EUR/USD dipped to lows near 1.0620 in an immediate reaction to the Fed statement. The dollar then posted losses with EUR/USD regaining ground to post net gains in very choppy trading during Powell’s press conference. EUR/USD settled just above 1.0650 on Thursday as weaker risk appetite supported the dollar.

USD/JPY jumped to near 136.00 in an immediate response to the Fed decision, but then dipped sharply to near 135.00 as yields dipped. USD/JPY recovered to 135.65 on Thursday.

The Swiss franc posted gains amid speculation that there could be a larger National Bank rate hike. EUR/CHF retreated to 0.9835 before recovering to 0.9860. USD/CHF hits highs at 0.9300 before a retreat to 0.9230.

Sterling overall was again resilient during the day amid short covering. GBP/USD dipped to 1.2350 after the Fed decision and settled just below 1.2400 from 1.2440 highs.

Commodity currencies rallied from intra-day lows amid choppy conditions. AUD/USD settled around 0.6830 as weak Chinese data sapped currency support. USD/CAD was unable to hold above 1.3600 and settled around 1.3560.

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