Morning Brief – Fed up, ECB up?

Charles Porter
Thu 27 Jul 2023

Fed up, ECB up?

Despite last night’s Federal Reserve decision still ringing in the ears of markets this morning, there will be little respite. With the ECB decision only a few hours away, markets will remain attentive. Summer trading conditions have hampered volatility but this could show signs of stress should any surprises be concluded from the combined set of central bank decisions this week. We have already covered the significance of today’s ECB decision given the data emerging from the Eurozone. However, ahead of the release, can we learn anything from last nights decision?

Yesterday’s hike from the Federal Reserve whilst widely expected was still important. The decision to hike by 25 basis points extends the Fed’s colossal hiking cycle that has dragged domestic rates to their highest nominal level for 22 years. Moreover, it recommences the cycle given the FOMC’s decision to leave rates unchanged at the June meeting. Given the encouraging data since that last meeting, a decision to hike last night will reinvigorate global rate expectations and likely push the peak of many rate curves further ahead. 

Last night’s decision failed to support the US Dollar largely due to the market’s interpretation of Powell’s comments regarding the September meeting. Leaving the door wide open for a no-hike decision, terminal rate expectations were scaled back. Despite the failure to secure gains following the decision to hike, the US Dollar did not fare so badly as to lose the significant ground it has clawed back versus the Euro in recent sessions. Crucially, the decision to hike could leave markets even more sensitive than usual to any softness in rhetoric or substance from the ECB later today.

Discussion and Analysis by Charles Porter

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