Powell warns rate hikes could be accelerated.

The Federal Reserve increased interest rates by 0.25% to 0.50% which was in line with consensus forecasts, although St Louis Fed President Bullard dissented and called for a 0.50% hike. According to the Fed, indicators of economic activity and employment have continued to strengthen while inflation remains elevated reflecting supply and demand imbalances, higher energy prices and broader price pressures.

It added that implications of the Ukraine conflict are highly uncertain, but there is likely to be further upward pressure on inflation. The Fed anticipates that on-going increases in the Fed Funds rate will be appropriate.

Rate projections from Fed members recorded an increase in the end 2022 Fed Funds rate to 1.9% from 0.9% previously.

Chair Powell stated that all meetings are live with situations changing all the time and that the Fed will move more quickly if it is appropriate to do so, especially as the labour market is unhealthily tight. He added, however, that monetary policy is starting to weigh on inflation and growth with a larger impact in 2023 and 2024.

Powell added that the balance sheet would be reduced to ensure that higher inflation does not become entrenched, but with no clear comments on timing.

Russian President Putin stated that he did not want to occupy Ukraine. There were also reports that the Ukraine and Russia had made significant progress on a 15-point peace plan.

President Biden, however, called Putin a war criminal following reports of further attacks on civilians in Mariupol and the US promised another huge military aid package.

Although the Federal Reserve increased interest rates, there was some relief that the rhetoric was not even more hawkish and Wall Street equities posted strong gains with hopes for peace progress in Ukraine also contributing to further buying. Global bourses also made strong headway.

Despite Powell’s warnings over the risk of faster rate increases, the dollar was unable to sustain initial gains and retreated with much of the tightening already priced in.

The latest Australia labour-market data was again stronger than expected with an employment increase of over 77,000 for February compared with expectations of a 35,000 increase while the unemployment rate declined to 4.0% from 4.2%.

The data reinforced expectations that the Reserve Bank would tighten policy.

Markets expect that the Bank of England will raise interest rates by a further 0.25% to 0.75% at today’s policy meeting. Given a high degree of uncertainty, coupled with upward pressure on inflation and weaker growth, there is a wide range of views on forward guidance.

There has been increased speculation that the central bank could sanction a 0.5% rate increase, leaving the Pound vulnerable if the decision is relatively dovish.

The Euro spiked briefly during Wednesday on reports of progress in Russia/Ukraine peace talks. EUR/USD dipped to lows near 1.0950 after the Fed statement before recovering ground.

Higher US yields initially boosted the US currency against the yen, but the dollar was unable to gain support from the Fed rhetoric and lost ground with rate increases priced in. US bond yields also dipped lower on Thursday.

EUR/USD strengthened to highs just above 1.1050 and held comfortably above 1.1000 on Thursday. USD/JPY posted 6-year highs above 119.00 before a retreat to 118.75. Sterling was able to secure net gains ahead of the Bank of England policy decision with stronger equity markets providing support and fresh speculation over a 0.50% BoE rate hike. GBP/USD posted strong gains to above 1.3150.

The Swiss franc was on the defensive as yields increased elsewhere with net EUR/CHF gains to 1.0365. USD/CHF posted 11-month highs at 0.9460 before a retreat to 0.9400.

Commodity currencies posted net gains as equities strengthened. AUD/USD strengthened sharply to 0.7320 highs as the strong jobs data provided further Aussie support. Headline Canadian CPI inflation increased to a 30-year high of 5.7% from 5.1% and above market expectations of 5.5%. USD/CAD dipped below 1.2700 amid a wider US retreat and traded around 1.2675.

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