Fed hikes base rate 0.25% as expected, first increase since December 2018. Projections suggest an increase at each of the six remaining 2022 meetings. US economic growth estimate for 2022 reduced to 2.8% from 4.0%, inflation rises to 4.3% from 2.6%. Equities, US Treasury rates rise, dollar falls on retreating Ukraine safety trade. The Federal Reserve raised its base rate for the first time in three years marking the official end of the extraordinary policy response to the Covid pandemic. This came after two years of a zero-rate program, where Treasury yields reached record lows,  The Federal Open Market Committee (FOMC) voted to increase the target range for the fed funds rate to 0.25%-0.5%. The governors said they expected to begin reducing the bank’s $9 trillion balance sheet at a coming meeting. The vote was 8 to 1 with James Bullard, President of the St Louis Fed backing a 0.5% increase.  Federal Reserve Chair Jerome Powell observed in his press conference that the plans for the balance sheet were well advanced and the start could come as soon as the next FOMC meeting in May.  In addition to today’s increase, the bank's Projection Materials posited six more rate increases this year with an median estimate for a 1.9% base rate after the final bank meeting on December 14. The prior set of projections from December 2021 had three hikes to year-end and a 0.9% fed funds rate. Markets Treasury and commercial interest rates have been anticipating this Fed move for many weeks. The yield on the 10-year note reached a three-year high of 2.246% during Fed Chair Jerome Powell’s press conference before retreating slightly to the close. 10-year Treasury yield CNBC Equities responded to Mr. Powell’s characterization of the US economy as “very strong” with an “extremely tight” labor market.   “We will not let high inflation become entrenched. The cost of that is far too high,” promised the Fed chair. The three major US averages rebounded from their initial dips to close sharply higher. US equities CNBC The dollar was lower in all its major pairs except the USD/JPY, despite the rise in US Treasury rates, a result that owed more to reports of progress in the Ukraine cease-fire talks and a retreat of the safety-trade than to any Fed policy changes.  Oil and commodity prices were slightly lower on the day. West Texas Intermediate (WTI) has returned to its level just before the Russian invasion of Ukraine began on February 24.  Final thoughts on the Fed Caution was the Fed's unstated policy at the March FOMC. The governors raised the fed funds 0.25% as universally expected, and did nothing else. They did not begin the balance sheet reduction nor did they specify when it might start. Chair Powell said that the preparations are nearly complete and suggested it could start in May. Behind all economic and rate considerations was the Fed’s recognition that the Ukraine war could yet upend the US and global economies and all of the bank’s predictions and policies. Markets greeted the policies with relief that the Fed did exactly what was expected. More important to equities and Treasury rates were rumors of improving prospects for a ceasefire in Ukraine . If and when the Ukraine war is settled, the Fed is well-positioned to turn up the heat on inflation should prices continue to rise. Until then, discretion is clearly the better part of rate valor. 

Australian policymakers are shifting the focus from wage growth to inflation. Developments around the Russian-Ukrainian crisis will likely set the market’s tone. AUD/USD is technically bullish and could extend its recovery beyond 0.7300. Australia will release its February employment report early on Thursday and is expected to announce it has added 37K new job positions in the month. The Unemployment rate is foreseen down to 4.1% from 4.2% in January, while the Participation Rate is expected to have increased from 66.2% to 66.3%. The country reports wage growth on a quarterly basis, and according to the latest available data, the Wage Price Index was up 0.7% QoQ in the last quarter of 2021 and by 2.3% over the year, matching the pre-pandemic annual growth. The encouraging reading, however, fell short of reaching the 3% target that policymakers believe would be enough to trigger a rate hike. RBA concerned about inflation The Reserve Bank of Australia has been leaning towards a more hawkish stance, however, and wage growth is slowly losing its relevance in terms of monetary policy. The central bank has maintained its patient stance in its early March meeting – although adding that inflationary pressures may rise amid surging commodity prices after Russia invaded Ukraine. Governor Philip Lowe suggested that a rate hike could come before the year-end should the Eastern Europe crisis fuels inflation. The Australian Consumer Price Index rose 1.3% in Q4 2021, reaching 3.5% YoY, above the medium-term range and central bank’s target of 2-3%. Given that the local economy is showing signs of robust growth, an encouraging employment report could provide only temporary support to the AUD, while a miss in the headline could spur some selling of the commodity-linked currency. At the end of the day, the AUD direction will depend on how market players are positioned for risk. AUD/USD possible scenarios The AUD/USD pair is in recovery mode after bottoming for the week at 0.7164. The ongoing advance has to do with news indicating that Moscow believes that a neutral Ukraine is a possible option for a diplomatic solution. The market’s optimism underpins the pair, and will likely maintain it on the bullish side, as long as speculative interest believes there is an end to the Russia-Ukraine crisis. From a technical point of view, the AUD/USD is bullish. The daily chart shows that technical indicators bounced sharply from around their midlines and that the pair recovered above its 100 SMA. It would need to recover above the 20 SMA, currently at around 0.7250, to confirm a bullish continuation in the upcoming sessions towards the 0.7300/30 price zone. Beyond the latter, the rally could continue towards 0.7370. If the aforementioned weekly low gives up, the pair could extend its slide initially to 0.7100, particularly if the market’s mood takes a turn for the worst.

EUR/USD extended its sideways consolidative price move and remained confined in a range. The Ukraine crisis, hawkish Fed expectations underpinned the USD and acted as a headwind. Investors also seemed reluctant and preferred to wait for the outcome of the FOMC meeting. The EUR/USD pair edged higher on Tuesday and moved away from the weekly low touched the previous day, though the uptick lacked bullish conviction. Despite the fact that several rounds of peace talks between Russia and Ukraine have failed to deliver a breakthrough, investors remain hopeful about a possible diplomatic solution to end the war. The optimism was evident from the risk-on impulse in the financial markets, which prompted some intraday selling around the safe-haven US dollar and extended support to the major. That said, Russian forces have stepped up their aggression in Ukraine and intensified bombardment of Ukrainian cities. Given its geographical proximity, worries that the European economy would suffer the most from the spillover effects of the Ukraine crisis acted as a headwind for the shared currency. This was reinforced by the German ZEW Economic Sentiment Index, which deteriorated sharply to -39.3 for March from 54.3 in the previous month. Apart from this, hawkish Fed expectations helped limit losses for the USD and capped the pair. The market seems convinced that the recent geopolitical developments might do little to hold back the US central bank from hiking its target funds rate to rein in inflationary expectations. This was seen as a key factor that pushed the yield on the benchmark 10-year US government bond to the highest level since June 2019. Hence, the market focus will remain on the outcome of a two-day FOMC meeting, scheduled to be announced during the US session on Thursday. The decision will influence the USD and provide a fresh impetus to the major. The start of the policy tightening by the Fed could be seen as a fresh trigger for the USD bulls and set the stage for the resumption of the pair's bearish trend witnessed since early February. Heading into the key central bank event risk, traders will take cues from the release of the US monthly Retail Sales figures. Apart from this, fresh developments surrounding the Russia-Ukraine saga will drive the broader market risk sentiment and the USD demand. This, in turn, should allow traders to grab some meaningful trading opportunities. Technical outlook From a technical perspective, the pair, so far, has struggled to gain any meaningful traction and oscillated in a familiar range over the past few trading sessions. The subdued price moves warrant caution for aggressive traders and before positioning for a firm near-term direction. In the meantime, the overnight swing high, around the 1.1020 region, now seems to act as an immediate resistance ahead of the 1.1045 area. The next relevant resistance is pegged near the 1.1075 zone and the 1.1100 round-figure mark. Sustained strength beyond has the potential to lift spot prices further towards the 1.1145-1.1150 support breakpoint. On the flip side, the 1.0910-1.0900 zone seems to have emerged as immediate support. Some follow-through selling would make the pair vulnerable to accelerate the fall towards the 1.0850 region. Failure to defend the said support levels would expose the YTD low, around the 1.0800 mark touched earlier this month. A convincing break below the latter should pave the way for a slide towards the 1.0765 intermediate support en-route the 1.0730-1.0725 region. This is followed by the 1.0700 round figure, below which the downward trajectory could get extended towards 2020 low, around the 1.0635 area.

Fed to kickstart policy normalization with a 25 bps hike in March. Gold has been suffering heavy losses this week amid surging US T-bond yields. XAU/USD is likely to remain under bearish pressure unless Fed adopts a dovish policy outlook. Gold came under strong selling pressure at the start of the week and erased the majority of the gains it registered since the beginning of the Russia-Ukraine war. Heightened optimism for a peace agreement and rising US Treasury bond yields ahead of the US Federal Reserve’s policy announcements have weighed heavily on the yellow metal, dragging it to its lowest level in more than ten days. The Fed is widely expected to hike its policy rate by 25 basis points at the March policy meeting. Markets have been pricing that move since the beginning of the year. Hence, the Fed’s rate outlook, which will be revealed in the updated Summary of Economic Projections, and Chairman Jerome Powell’s tone on war-related uncertainty should be the thing that triggers a significant market reaction. December’s dot plot revealed that the Fed was expecting the Core Personal Consumption Expenditures (PCE) price index to average 2.7% in 2022, up from 2.3% in the previous forecast. The US Bureau of Economic Analysis reported on February 25 that the Core PCE jumped to 5.2% on a yearly basis in January from 4.9% in December. Additionally, the annual Consumer Price Index (CPI) in February rose to its highest level in four decades at 7.9% from 7.5% in January.  Inflation continues to run hot in the US and the Russia-Ukraine war is likely to cause it to remain elevated at uncomfortable levels for longer than estimated. Hence, an upward revision to inflation expectations could be seen in the dot plot. Fed officials made it clear that next policy steps will be taken with an intention to control inflation and that they are not really concerned about the growth outlook or the labor market. In fact, Nonfarm Payrolls (NFP) in the US increased by 678,000 in February, surpassing the market forecast of 400,000 by a wide margin, and the real Gross Domestic Product (GDP) grew at an annualized rate of 7% in the fourth quarter of 2021, compared to analysts’ estimate of 5.5%. Hawkish scenario Before the Fed went into the blackout period, Fed officials voiced their support for a 25 basis points (bps) rate hike in March and dismissed the need for a 50 bps increase. Although conditions have changed since then with surging energy costs amid the Russia-Ukraine conflict, the Fed is unlikely to surprise the markets with a double-dose hike. As it currently stands, markets are pricing in a 53% chance of a second 25 basis point rate hike in May. In case the Fed’s policy statement or Powell’s remarks suggest that policymakers are willing to hike the policy rate again at the next policy meeting, US Treasury bond yields could continue to push higher and weigh on XAU/USD. It would also be seen as a hawkish tone if Powell notes that a 50 bps rate hike will be on the table in the upcoming meetings. Dovish scenario In case Fed policymakers shift their attention away from inflation to the growth outlook  and voice concerns over increased downside risks, investors could assess this as a dovish tilt. Powell could also adopt a cautious stance and refrain from delivering a clear message on the timing of the second rate hike, which in turn could help gold stage a rebound. Gold technical outlook Gold trades below the ascending trend line coming from early February and the Relative Strength Index (RSI) indicator on the daily chart sits near 50, suggesting that sellers look to continue to dominate the precious metal’s action.  $1,920 (Fibonacci 50% retracement of the latest uptrend) aligns as first support. A daily close below that level on a hawkish Fed could open the door for additional losses toward $1,900 (psychological level) and $1,890 (Fibonacci 61.8% retracement). On the upside, XAU/USD could encounter resistance at $1,940 (20-day SMA) ahead of $1,950 (Fibonacci 38.2% retracement) and $1,970 (static level). Ideally, a dovish shift in the Fed’s policy outlook should be the primary driver for gold to stage a decisive recovery.

The S&P 500 index extended its Friday’s decline yesterday, but it remained within a week-long volatile consolidation. Is this a medium-term bottoming pattern? The broad stock market index lost 0.74% on Monday, Mar. 14, after its Friday’s decline of 1.3%. The market bounced from the short-term resistance level of 4,300 and it extended a volatile consolidation following the early March sell-off from the 4,400 level. Last week on Tuesday it reached the local low of 4,157.87 and then we’ve seen a rebound to the 4,300 level. Yesterday the S&P 500 came back below the 4,200 level again. The market is closer to the Feb. 24 local low of 4,114.65. It was 704 points or 14.6% below the January 4 record high of 4,818.62 then. There’s still a lot of uncertainty concerning the ongoing Ukraine conflict. This morning the S&P 500 index is expected to open 0.5% higher following lower than expected Producer Price Index release. The market will be waiting for the important tomorrow’s FOMC Statement release, and we may see some further consolidation. The nearest important resistance level is now at around 4,200. On the other hand, the support level is at 4,100-4,150. The S&P 500 index continues to trade slightly above the recently broken downward trend line, as we can see on the daily chart. Futures contract trades along the previous lows Let’s take a look at the hourly chart of the S&P 500 futures contract. Today it is bouncing from the 4,140 level. It’s a support level marked by the previous local low. The support level is also at 4,100. We are still maintaining our long position, as we are expecting an upward correction from the current levels. Conclusion The S&P 500 index will likely bounce this morning following better-than-expected producers’ inflation data release. The market may extend its volatile consolidation and we may see more uncertainty, as investors will be waiting for Wednesday’s FOMC Statement release. Here’s the breakdown: The S&P 500 index will likely bounce this morning, but we may see some more short-term uncertainty. We are maintaining our long position (opened on Feb. 22). We are still expecting an upward correction from the current levels. Want free follow-ups to the above article and details not available to 99%+ investors? Sign up to our free newsletter today!

Fed rate decision – 16/03 – in essence this week’s Federal Reserve rate decision is probably the easiest one it will have to make this year. With US headline inflation at 7.9%, and likely to go higher it’s pretty much certain that we will see an interest rate rise this week of 0.25%. There are some on the FOMC who are probably in the camp that want to see a 50bps rate rise, however in light of the Russian invasion of Ukraine and the resultant surge in global commodity prices we could well see a bit of caution. The most recent payrolls numbers showed that wages growth slowed from 5.5% to 5.1% in February, which while still quite strong doesn’t suggest that wages are about to explode higher yet. The Fed’s bigger problem is how it manages its messaging for future rate rises against a backdrop of surging input prices which are likely to slow the US economy over the course of the rest of the year. St. Louis Fed President James Bullard has been particularly vocal about the need for a 1% rise in interest rates by 1st July, and with the Fed’s unemployment mandate more or less met, the main focus is set to be on inflation and the prospect that we could see headline CPI hit 10% by the middle of the summer. This week’s growth and inflation forecasts are likely to be significant in that context as markets look to price the prospect of how aggressively the Fed might tighten monetary policy over the next few months. Before the Russia invasion of Ukraine some market pricing was suggesting we might see 7 rate rises this year, and while some are suggesting that might not happen now, there is an argument that it might be the lesser of two evils. The transitory playbook seems so last year now with the Fed having to balance the risks of tightening too quickly and tipping the economy into recession or allowing inflation to do it for them by letting it rip.               Bank of England decision – 17/03 – in some respects, despite its muddled guidance over the last few months, the Bank of England has been ahead of the game when it comes to rate rises. Two rate rises since December has put base rates back to 0.5%, still below the levels they were pre-pandemic. With unemployment still low, and average wages still subdued the central bank must be looking with some concern over how much further this run high in inflation is likely to go. With CPI already at 5.5%, and RPI even higher the Bank of England is already expecting prices to rise further with a target of 7.25% by April. In light of recent events and the surge we’ve seen in commodity prices, both energy and agricultural this level is likely to get surpassed in the coming months with the very real prospect we could see a move into double figures and above 10% by the summer. Like the Federal Reserve this will present the Bank of England with very real problems when it comes to meeting its inflation mandate. A weaker pound is unlikely to help either, which means the Bank of England will probably have to hike many more times by the time the year is out. This is likely to have significant consequences for the UK economy, and more specifically for the housing market, and those not currently on fixed rates mortgages. As we look ahead to this week’s rate decision it’s hard to see how the Bank of England can avoid raising rates again by 0.25% and put the base rate back where they were pre-pandemic.      China retail sales (Feb) – 15/03 – back in December China retail sales fell back sharply coming in at 1.7%, well below expectations of 3.8%, although industrial production came in slightly better at 4.3%. In a sign that the central bank is concerned about the weakness in the economy, the medium-term lending rate was cut by 10 bps to 2.85% on its one-year medium term lending facility. Since then, we’ve had little indication of how well or otherwise the Chinese economy has been doing, although with Chinese New Year you would expect to see a pickup as we look ahead to this week’s retail sales numbers for both January and February combined. Last week’s trade data showed that export growth was resilient, although it still slowed, rising 16.3% compared to a year earlier, and down from 29.9% in December. Imports were also subdued, rising 15.5%, and down from 19.5% in December. This weakness suggests that higher prices and supply chain disruptions are continuing to have an effect, while various covid restrictions are likely to remain a brake on...

Global markets descended into turmoil after Russian forces rolled into Ukraine. Commodity prices have gone through the roof and traders are betting this shock will keep the inflationary fire burning for some time. The Fed and the Bank of England are set to raise interest rates next week to combat spiraling prices, although the most crucial variable for their respective currencies may be whether there’s a ceasefire in the war. 

Summary United States: Intensifying War Pours Some Gas on Price Growth Russia's invasion of Ukraine continues to loom large as the war has intensified. Most data released this week, however, do not capture the market volatility felt since the invasion has taken center stage. The U.S. trade deficit widened to a record $89.7B in January, while job openings remained elevated and consumer prices continued their string of white-hot gains in February. Next week: Retail Sales (Thu), Industrial Production (Thu), Existing Home Sales (Fri) International: European Central Bank Signals a Faster Tapering of Bond Purchases The European Central Bank (ECB) sprung something of a surprise at this week's monetary policy announcement, announcing an accelerated tapering of its bond purchases despite uncertainty surrounding the Ukraine conflict. While the ECB took a more hawkish stance on tapering, it did not make significant changes regarding the timing of interest rate increases, in our view. We still believe the ECB is on pace to lift its Deposit Rate 25 bps at its December 2022 meeting. Next week: China Activity (Wed), Australia Employment (Thu), BoE Policy Announcement (Thu) Interest Rate Watch: Let the Tightening Cycle Commence Despite the uncertainty arising from the Russian invasion of Ukraine, we expect the FOMC to commence monetary tightening with a 25-bp rate hike at next week's meeting. We expect to see a total of 225 bps of tightening between now and the end of 2023. Credit Market Insights: Households Are Wealthy, But Drop in Revolving Credit is an Enigma Data this week showed household net worth climbed above $150T for the first time in Q4 due to attractive opportunities in the stock market and real estate in the pandemic era. In a separate release, January's drop in revolving credit led to a lower-than-expected increase in consumer credit, despite strong spending that month. Topic of the Week: Childcare Issues Impact Working Women In celebration of International Women's Day, March 8th, we examined the industry most central to working women: childcare. Childcare is not only the most female-dominated industry but also the one keeping parents with young children, particularly women, out of the workforce. Download the full report