Fed hikes rates 50 basis points to 1.00%.

The Federal Reserve increased interest rates by 50 basis points to 1.00% which was in line with consensus forecasts and the vote was unanimous. According to the statement, household spending and investment remain strong despite a slight decline in economic activity for the first quarter while inflation remains elevated.

It added that further rate increases are expected, but also noted that the implications of the Ukraine war on the US economy are highly uncertain.

The Fed will start to shrink the balance sheet from the beginning of June with an initial cap at $47.5bn for the first three months which will then be increased to $95bn.

The central bank was optimistic that inflation would retreat to the 2% target with appropriate tightening.

Comments from Fed Chair Powell were broadly hawkish on inflation with the need to tighten policy relatively quickly, especially as the labour market was very tight. Nevertheless, he ruled out increasing interest rates by more than 50 basis points at any individual meeting.

Powell expressed hopes for a soft landing, but added that this would not be easy.

Following Powell’s comments there was a dip in US yields with 2-year yields declining 10 basis points.

Powell’s ruling out of rate hikes of more than 50 basis points provided decisive for markets with market expectations surrounding rates scaled back slightly.

The dollar lost ground as shorter-term yields dipped lower with pressure for a correction also a key element after the recent strong US gains.

The decline in US yields also provided significant relief for Wall Street and equites rallied strongly with the S&P 500 index posting a gain of 3.00% on the day.

Global markets still fretted over the Chinese outlook, especially after a notably weak Caixin PMI survey.

Lower US yields and a dollar retreat also provided important relief for precious metals with a strong rebound in gold following Powell’s comments.

There are strong expectations that the Bank of England will raise interest rates again at this month’s policy meeting with a further 25 basis-point increase to 1.00% in an attempt to curb inflation and keep inflation inflations in check.

Markets also expect relatively dovish guidance given downside risks to the UK economy with investment banks generally bearish over the Sterling outlook.

The Euro was able to make limited headway ahead of the Fed rate decision with increased expectations of a July ECB rate hike. EUR/USD settled just below 1.0550 at the European close. EUR/USD jumped above the 1.0600 level after Fed Powell’s press conference with highs around 1.0640 before settling around 1.0610 on Thursday.

A decline in shorter-term US yields undermined wider US dollar support. USD/JPY dipped to lows below 129.00 before settling around 129.30.

The Swiss franc recovered strongly from intra-day lows. USD/CHF dipped sharply from 26-month lows around 0.9850 to 0.9730.

Sterling gained some relief after the Fed decision, but with notable selling on rallies. GBP/USD bounced to above 1.2600 before a fresh retreat to 1.2550 ahead of the BoE decision.

Commodity currencies posted very strong gains after the Fed statement with the rebound in equities also providing support. AUD/USD surged to 2-week highs above 0.7250 before correcting slightly.

The Canadian trade surplus was slightly lower than expected at C$2.5bn. USD/CAD also retreated sharply to lows near 1.2710 as oil prices also strengthened before a slight correction.

Economic Calendar

Expected Previous
07:30 CHF CPI (M/M)(APR) 0.50% 0.60%
07:30 CHF CPI (Y/Y)(APR) 2.40% 2.40%
07:45 France - Industrial Output MM(MAR) 0.20% -0.90%
08:30 EUR Markit Germany Construction PMI (APR) 50.9
09:30 GBP PMI Composite(APR 15) 60.9
09:30 GBP PMI Services(APR) 61 62.6
12:00 GBP BoE Inflation Report(Q/Q)
12:00 BOE MPC Vote Cut(MAY 01) 0/9
12:00 BOE MPC Vote Hike(MAY) 01-Sep
12:00 BOE MPC Vote Unchanged(MAY) 08-Sep
12:00 BoE Rate Decision(M/M)(MAY) 0.75% 0.75%
13:30 Nonfarm Productivity (Q/Q) 3.20% 6.60%
23:30 AUD AiG Performance of Service Index(APR) 56.2

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.