Morning Brief – Testing conviction

Charles Porter
Thu 23 Mar 2023

Testing conviction

With a Bank of England decision scheduled for later today and a Federal Reserve decision last night ringing in the ears of markets, traders should be braced for volatility. The decision last night by the Federal Reserve showed the FOMC treading a delicate path between demonstrating their commitment to taming inflation but being wary of not putting additional pressure on the fragile banking sector. Ultimately, 25 basis points worth of target rate hike was insufficient to attract any demand into the US Dollar. The Dollar, during highly volatile conditions, fell by more than one cent versus the Euro and Pound. 

The Pound found it harder to hang onto gains on the back of the weaker Dollar with investors distracted by the risk that today’s BoE decision inevitably brings. The Fed maintained its narrative that policy rate adjustment may soon be coming to an end but signalled additional adjustments could be forthcoming. You may rightly note that this is a similar overall decision to the last meeting. However, it was the language of the release that undermined the Dollar so fundamentally. The language surrounding policy adjustment switched from framing the decision as almost a foregone conclusion in the raging battle against inflation, to suggesting that data-dependent incremental adjustments may be necessary to achieve its 2% target. 

Given the threat inflation brings to the US and global economy, just this change of language framing the decision was sufficient to show a Fed that had turned a corner. Treasury prices firmed reflecting lower implied yields. However the dot plot interestingly showed relatively similar expectations within the FOMC as December 2022. Markets will be noting how differently yesterday’s dot plot may have looked if published several weeks ago. Recent data across the globe has confirmed more persistent inflationary pressures than had been widely expected. This brings into question the future of many of those currencies whose central banks have concluded their interim hiking cycle, notably the Canadian Dollar and other high-beta currencies. For now, focus will remain on GBP today and whether the Bank can maintain any confidence in its commitment to tame inflation despite yesterday’s data.

Discussion and Analysis by Charles Porter

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