Market Reaction to Fed's Decision

Yesterday the Fed (as expected) kept the interest rate unchanged (after a series of 10 increases). However, the opinion of market participants that the rate peak has been reached has been called into question. At the Jerome Powell's press conference, it became known that:

ECB as Expected Lifted Key Policy Rates by 25 bps

The ECB as expected lifted its key policy rates by 25 bps. The deposit rate now stands at 3.5%. The opening statement starts with the observation that inflation has been coming down combined with the confession that it is projected to remain too high for too long. Inflation forecasts faced a new upward revision compared to March. Changes to the headline figure are tiny: 5.4% for this year (from 5.3%), 3% next year (from 2.9%) and 2.2% for 2025 (from 2.1%).

Stocks Suffering from a Fed Hangover, ECB Signals a July Hike

THE ECB raised rates by a quarter percentage point and raised their inflation forecasts for the next couple of years.  The statement noted that the key ECB interest rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.  They confirmed that they will discontinue the reinvestments under the asset purchase program. 

Growth Forecasts Lower – RBA to Hike in Both July and August

Following the RBA's decision to raise the cash rate to 4.1% in June we lifted our forecast for the cash rate peak to 4.35% on the expectation of a further immediate 0.25% increase in July while noting that there was "considerable risk" of a follow-on move in August.

Euro Rallies after ECB Raises Rates and Inflation Forecasts

It was mostly a good day for the global markets, except for Europe, which saw the European Central Bank (ECB) expectedly raise interest rates by 25bp, but unexpectedly raised inflation forecast, as well.

Bank of Japan Still Pushing Back Against Policy Normalization

The Bank of Japan kept its monetary policy unchanged this morning, still pushing back against policy normalization even as inflation runs above the central bank’s 2% target. It has been at around 3.5% recently owing to the effects of a pass-through to consumer prices of cost increases led by a rise in import prices.

Welcome to a Bipolar World of Monetary Policies

Monetary policies and guidance of the 4 major central banks are moving in the opposite direction. US Fed and Eurozone ECB are in the hawkish camp while Japan BoJ and China PBoC are still in accommodating mode.

EUR/USD Analysis: +1.4% in 2 Days

EUR/USD rate is approaching the psychological mark of 1.1. If in February the bulls suffered a quick setback (A), and in April-May they managed to linger (B) around this mark, then the continuation of the current momentum can lead to a successful bullish breakout and fixing the rate above 1.1.

USD/CAD

The week wrapped up with Canada’s May employment report, which usually is released at the same time as the US job data, but had the spotlight to itself today. The data was a disappointment. Canada’s economy shed 17,300 jobs, all of which were full-time positions. This followed an increase of 41,400 in April and missed the consensus of a gain of 23,200. The unemployment rate rose from 5.0% to 5.2%, the first rise since August 2022.

Weekly Focus

We are entering a big central bank week, with rate decisions from the US Federal Reserve, the European Central Bank and the Bank of Japan. It seems highly likely that the ECB will deliver another 25bp rate hike, but the Fed outlook is a bit more uncertain. We expect that this will be the first FOMC meeting since January 2022 where there is no rate hike, but market pricing is not ruling out a hike on Wednesday.