The dollar can gain the upper hand in the short term

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Markets

US equity markets fared better yesterday, with major indexes closing up 3%. Nasdaq support at 12552 (38% retracement on the post-Covid 2020-2021 rally) has held for the second time, but the technical chart is obviously not improving yet. We believe 2022 will be a tough year for riskier assets as they will have to endure a hawkish Fed in reaction to/on top of the cost spike. Core bonds have stabilised/recovered somewhat from this month’s blows, with some investors locking in profits ahead of tonight’s verdict. The daily variations of the US yield curve oscillate between -1.1 bp (2 years) and +1.1 bp (10 years). The German bull curve flattened with yields sliding from 7.2 basis points (2 years) to 1.9 basis points (30 years). The Euro wasn’t too bothered by the relative loss of interest rate support, with EUR/USD and EUR/GBP closing broadly flat at 1.0956 and 0.8399 respectively.

The Fed will begin its interest rate tightening cycle tonight by raising rates by 25 basis points. Some Fed governors have suggested a 50 basis point maiden move, but Fed Chairman Powell told lawmakers earlier this month that market uncertainty and volatility related to the Russian invasion in Ukraine meant that the US central bank should not become a source of additional tension on the markets. He nevertheless suggested that Steps > 25 basis points could be a possibility later in the cycle if inflation (expectations) justifies it and/or the tight US labor market.

The new summary of economic projections should show a further improvement in inflation forecasts, but the focus will be on governors’ thoughts on the future path of interest rates (dot chart). Markets are currently discounting the equivalent of 25 basis point rate hikes at every remaining Fed meeting this year (7 including today). We believe that the Fed will be ready to more or less respect this line.

Beyond this year’s projections, the key question will be where Fed governors see the terminal rate. The market is currently pricing in a neutral top of just under 2.5% at the end of 2023. Will the Fed be more hawkish on this by signaling the desire to apply a restrictive monetary policy (beyond the neutral rate of 2.5%)?

In addition to interest rate guidance, there is the second important pillar of the Fed’s normalization plans: run down the balance sheet. The U.S. central bank indicated that this process would begin soon after the interest rate hike, but provided little information on the pace and purpose of the current balance sheet of $9 billion. We believe the Fed may delay these detailed plans for its May or June meeting, in accordance with Powell’s guidelines not to become an additional source of tension in the market.

From a market perspective, we do not yet expect a significant correction from the core bond sell-off. If the focus is on interest rates rather than the BS run-off, this implies further bearish curve flattening.

With the European Central Bank finally giving the euro some medium-term support last week, we think the dollar can gain the upper hand in the short term. Due to a hawkish Fed, fragile risk sentiment and ongoing tensions in Ukraine. The year-to-date low at EUR/USD 1.0806 is the final benchmark ahead of the March 2020 low (1.0636).

News headlines

Sarah Bloom Raskin has stepped down as President Biden’s nominee for Vice Chairman of Fed Oversight yesterday. She has faced stiff Republican opposition since her nomination in January. But Raskin’s chances for what is seen as the most powerful bank regulator post really dwindled significantly after Democratic Party Senator Manchin announced he would not support her in the 50-50 split Senate. . Biden has yet to put forward an alternate candidate. The position may even remain open ahead of the US midterm elections in November.

House prices in Australia rose 4.7% q/q in the last quarter of 2021. This is slightly down from 5% in the previous quarter, but more than the 3.5% expected. The year-on-year rise hit a new high of 23.70% (vs. 21.70% in the third quarter) since recording began in 2003. Of the eight capitals, Brisbane (9.6 %q/q) and Adelaide (6.8%) recorded the largest increases. “Days on market have fallen and sell trade volumes have increased,” the statistics office said, referring to historically low interest rates and continued strong demand that have supported price growth. real estate.

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