December 15, 2022

“The Fed raised interest rates by 50 basis points as expected to the range of 4.25-4.5%. The US dollar rallied initially, but soon lost its strength as Fed’s Jerome Powell hinted on a lower interest rate peak if the central bank continues to see soft inflation data. However, market’s risk-off mood helped the currency stay resilient across the board. All eyes are on the BoE and ECB policy decision and their post-meeting press conferences later today, which pose event risk for the euro and sterling.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The US Senate late yesterday passed by voice vote a bill to bar federal employees from using Chinese-owned video-sharing app TikTok on government-owned devices. The bill must still be approved by the US House of Representatives before going to President Joe Biden for approval. The House of Representatives would need to pass the Senate bill before the current congressional session ends, which is expected next week. The Senate action comes after North Dakota and Iowa this week joined a growing number of states in banning TikTok, owned by ByteDance, from state-owned devices amid concerns that data could be passed on to the Chinese government.

Nurses across much of the UK launched a historic strike today, as they prepare to walk out of hospitals and onto picket lines after several years of falling pay and declining standards left the country’s nationalised health care system in a state of crisis. As many as 100,000 members of the Royal College of Nursing (RCN), the UK’s biggest nursing union, are expected to take industrial action in England, Wales and Northern Ireland, in the latest and most unprecedented of a wave of strikes that has swept Britain this winter. It will be the largest strike in the RCN’s 106-year history. It comes after several years of hardship for employees of Britain’s National Health Service (NHS), a revered but beleaguered institution that is straining due to staffing shortfalls, sky-high demand and stretched funding.

GBP

Sterling is weaker than most major currencies in the early morning trade. Sterling weakened against a broadly firm dollar today ahead of a Bank of England meeting that is expected to conclude with a half-percentage-point hike in interest rates to tame inflation. Data earlier this week showed UK inflation easing from a 41-year high but it remains high at 10.7%. The BoE will announce its policy decision at 12:00 GMT. Money markets attached a roughly 30% chance to a bigger hike of 75 bps. The BoE has been hiking rates since late 2021 to contain inflation, but officials are increasingly split on how much tightening is needed as the economy faces recession. Latest inflation data supports the idea that tightening should slow down. Data on Monday showed Britain’s economy rebounding in October, but fears of a recession dominate.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. The European Central Bank is set to raise interest rates for the fourth time in a row today, although by less than at its last two meetings, and lay out plans to drain cash from the financial system as it fights runaway inflation. The central bank for the 19-country eurozone raised interest it pays on bank deposits from -0.5% to 1.5% in just three months, reversing a decade of ultra-easy policy after being wrong-footed by the sudden rise in prices. But today’s policy meeting is likely to see this brisk pace of tightening slow as inflation shows signs of peaking and a recession looms.

USD

The dollar is well bid against most major currencies overnight. The Federal Reserve lightly tapped the brakes on its high-speed interest rate rises yesterday following news that suggested two years of runaway inflation may be slowing down in the US. After a two-day meeting the Fed announced another half-point increase in interest rates, its seventh increase of the year but one that follows four straight three-quarter-point interest rate hikes. The increase brings the Fed’s benchmark interest rate, used for everything from setting mortgage rates and loans to credit cards, to a range of 4.25% to 4.5%, its highest level in 15 years. The central bank has been raising rates at a pace unseen in decades as it fights to tamp down a cost of living crisis that saw inflation rise to a four-decade high of 9.1% in June.

Markets

European stocks retreated this morning as global markets dip following the US Federal Reserve’s latest policy update. The pan-European Stoxx 600 was down 1.2% in early trade, with retail stocks shedding 2% to lead losses as all sectors and major bourses slid into negative territory. Major US indexes and markets in the Asia-Pacific region reacted negatively after the Fed raised its benchmark interest rate to the highest level in 15 years. The Dow Jones Industrial Average fell 142.29 points, or 0.42%, to 33,966.35. The S&P 500 declined 0.61% to 3,995.32. The Nasdaq Composite dropped 0.76% to 11,170.89.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Euro-Area Nov. New Car Registrations
8:45 a.m.: France Nov. CPI
9:30 a.m.: SNB Rate Decision
10:00 a.m.: Norges Bank Rate Decision
1:00 p.m.: BOE Rate Decision
2:15 p.m.: ECB Rate Decision
2:30 p.m.: US Jobless Claims, Nov. Retail Sales
2:45 p.m.: ECB’s Lagarde speaks
3:15 p.m.: US Nov. Industrial Production
5:30 p.m.: Israel Nov. CPI

Corporate Events

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