Fed hikes 75 basis points.

The Federal Reserve increased interest rates by 75 basis points to 3.25% which was in line with consensus forecasts and with a unanimous vote. The statement noted that inflation remained elevated and that the central bank was highly attentive to inflation risks with interest rates set to increase further.

The new set of economic projections downgraded the growth outlook with inflation forecasts slightly higher. The end-2022 projection for the Fed Funds rate was increased to 4.4% from 3.4% in June with the end-2023, forecast raised to 4.6% from 3.8%, but rates are expected to decline over the following two years.

Fed Chair Powell reiterated the need to combat inflation and that the Fed will be moving policy to a level that is sufficiently restrictive. He added that inflation risks are still skewed to the upside and the bank will want compelling evidence that inflation is declining with the probability that a restrictive policy will be needed for some time.

In this context, Powell warned that it was likely that a period of substantially slower growth was quite likely and it would be painful to get inflation down while labour-market conditions may soften. He did, however, add that it will eventually be prudent to slow the pace of rate increases.

The Bank of Japan made no changed to monetary policy at the latest policy meeting with interest rates held at -0.1% and the 10-year bond yield target of 0.1%.

The dollar posted net gains following the Federal Reserve policy decision with overall yield spreads continuing to underpin the US currency.

USD/JPY jumped to fresh 24-year highs above 145.00 following the Bank of Japan policy and traded above this level in early Europe on Thursday. EUR/USD also traded at fresh 19-year lows.

The Bank of England (BoE) will announce its latest policy decision on Thursday. The bank faces a very tough call given overall pressures on the economy. Overall expectations are that interest rates will be increased by at least 50 basis points.

Consensus forecasts are for the Swiss National Bank (SNB) to raise interest rates by a further 75 basis points to 0.50% at the latest policy meeting wth intervention rhetoric monitored closely.

Russian President Putin’s announcement of military mobilisation triggered renewed demand for the Swiss franc with EUR/CHF sliding to fresh 7-year lows.

The Norwegian Norges Bank is forecast to increase interest rates by 50 basis points to 2.25%

The data releases had little market impact on Wednesday. Unease over the Ukraine situation dragged the Euro lower during the day with renewed fears over energy supplies. Higher yields were important in underpinning the dollar.  A sharp dip in equities also triggered defensive demand for the US currency. EUR/USD posted fresh 19-year lows just above 0.9800 before stabilising.

USD/JPY surged to 24-year highs above 145.00 after the Bank of Japan policy decision. There was no intervention by the Bank of Japan. USD/JPY briefly dipped below 145.00 with strong offers from major funds before strengthening again.

The Swiss franc posted renewed gains with defensive support from the Ukraine situation. EUR/CHF slumped to fresh 7-year lows below 0.9500. USD/CHF was unable to make headway and traded around 0.9650.

Sterling was unable to gain significant support, especially when risk appetite deteriorated. GBP/USD dipped sharply to fresh 37-year lows near 1.1220.

Commodity currencies remained under heavy pressure due to dollar strength and weaker equities.  AUD/USD posted 28-month lows below 0.6600. USD/CAD posted 2-year highs just above 1.3500 with highs around 1.3530.

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