Fed front loads with 75 basis-point rate hike.

The Federal Reserve increased the Fed Funds rate to 1.75% at the latest meeting which came as little of a surprise following the effective briefing to the Wall Street Journal on Monday. The usually hawkish Kansas City head George dissented and called for a 50 basis-point hike.

After the largest rate hike for over 30 years, the Fed noted that it is highly attentive to inflation risks and interest rates are expected to increase further.

There was a big shift in rate projections from individual members with the median projection that rates will be at 3.4% at the end of this year from 1.9% at the March meeting. The end-2023 median rate was also increased to 3.8% from 2.8%, but rates are expected to edge lower in 2024.

Chair Powell stated that it was essential to bring inflation down and that on-going rate increases are appropriate, especially as inflation risks have increased.

Powell did see evidence that the housing sector is softening and he expects the labour market to move into better balance with the unemployment rate expected to edge higher to help curb inflation.

He added that the July decision was liable to be a choice between 50 or 75 basis points while the short-term neutral rate is likely to be 3.00-3.50%.

US retail sales declined 0.3% for May after a downwardly-revised 0.7% gain the previous month and below consensus forecasts of a 0.3% increase. Underlying sales increased 0.5% on the month with the control group unchanged for the month.

US retail sales data is not adjusted for prices which suggested that volumes were lower.

The US dollar overall edged lower after the Fed policy decision with a covering of long positions after strong gains earlier in the week.

The aggressive front loading of rates also led to some hopes of an earlier than expected peak.

Risk appetite was also resilient with net gains on Wall Street which limited potential defensive support for the US currency.

Dollar selling was limited given overall Federal Reserve moves and risk appetite was still relatively fragile.

The ECB announced that it would skew bond re-investments of maturing debt to help more indebted countries and will also devise a new tool to stop fragmentation with work on the tool speeded up. There was a decline in peripheral yields following the move, but the Euro failed to benefit.

The Australian jobs data recorded a strong employment increase of over 60,000 for May compared with expectations of a 25,000 gain with the unemployment rate held steady at 3.9%.

The data maintained expectations of a more hawkish Reserve Bank policy stance.

Consensus forecasts are for the Bank of England to raise rates by a further 25 basis points to 1.25% on Thursday.

There are major uncertainties over the domestic outlook while global pressure for tighter policies has intensified which will complicate the Monetary Committee’s decision.

The Swiss National Bank is expected to hold interest rates at -0.75%, but with more hawkish forward guidance given the increase in inflation.

The Bank of Japan will announce its latest policy decision on Friday with pressure for the bank to let 10-year yields to move higher, especially given global pressures.

A move to let yields increase would strengthen the yen.

The New York Empire manufacturing index recovered to -1.2 for June from -11.6, but was below expectations with mixed evidence on inflation. The Euro failed to gain support from the relatively tame emergency ECB meeting. EUR/USD dipped below 1.0400 ahead of the Fed policy decision. EUR/USD rallied after Chair Powell’s press conference, but dollar selling was contained and the pair settled below 1.0450 on Thursday. The dollar retreated slightly against the yen as US yields edged lower.

There was caution ahead of the Bank of Japan policy meeting. USD/JPY dipped below 134.00 before settling around 134.25.

The Swiss franc edged stronger as global yields declined. USD/CHF dipped below parity and settled around 0.9950.

Sterling sentiment remained negative but secured short covering after heavy recent losses. GBP/USD advanced to near 1.2200 before consolidation around 1.2150. GBP/EUR rose sharply to below 0.8600.

Commodity currencies rallied and extended gains after the Fed meeting. AUD/USD attacked resistance around 0.7000 and held just above this level after strong jobs data. USD/CAD dipped to lows around 1.2860 before recovering to just 1.2900.

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