Rate moves in 2022 are a given, the pricing question has been how much and how fast. We are always sceptical of uber-hawkish calls, just as we are with uber-dovish. With that in mind it was very hard to see the Fed hitting the panic button and going hell-for-leather and ratcheting up the Fed funds rate at 50 basis points (bp) a pop per meeting from now until September.
But they are going to raise, and we have now had this confirmed by Powell himself for a second time in the space of a week. He did go a little further the second time after reiterating the Board had concerns around higher prices, he testified that he favoured a 25bp initial hike, but conceded he would be prepared to tighten more aggressively if needed but that wasn’t for the coming March meeting.
This signals that it likely to be a 25bp move per meeting to at least see the affect each move as and to move rates in a smooth and sustained fashion rather than shock and ore. This should be the playbook for 2022 FX but clearly there will be more to it than that now that the Ukrainian crisis is moving into a more critical phase.
Once again, it’s the EUR that is telling us the full story. EUR/USD hit a 20-month low on Friday at $1.1011 on news Russia was shelling the Zaporizhzhia nuclear power plant. The pair has now lost 3 cents since the conflict started – and momentum suggests it would stop anytime soon.
We remain very cautious in the current environment volatility is the only certainty currently.