Currency Point: Fed path set, balance sheet in focus

As expected FOMC raised the Federal Funds rate by 25 basis points (bps) to 0.25 to 0.50 per cent for a mid-range of 0.375%. Nothing unusual.

What was, was a hawkish outlook on the rate path for the rest of 2022. The dot plot projection is now indicating a hike at every reminding meeting of the year. This would take the Federal Funds rate to 1.75 to 2.00 per cent with at mid-range at1.875% for Christmas. A further three hikes are forecast by the FOMC seeing the Federal Funds rate at 2.75% by Christmas next year. That is some slowing – and the board is going to be walking a very thin line as it battles high inflation while hoping it does not cause a recession.

That the press conference, Chair Powell stated the board want to lift rates “steadily”. Something we expected, but not to the final level it is forecast.

He also stated that the probability of a recession in 2022 is “not particularly elevated” believing the economy is ‘strong’ and can still flourish in the face of tighter policy – no mention of his views on 2023 though.

One other comment of note was that he touched on the fact every meeting is now a live one and that if inflation continued to run away at these elevated levels and thus it was more appropriate to move even quicker, the Fed will do so.

The balance sheet was also something he concentrated on, stating they are making “excellent progress”. He suggested there would be an announcement on specifics around the balance sheet in due course some now believe this could come as soon as the next meeting in May. This point has really caught the attention of the FX world as Fed-speak over the past few weeks has been that the Board is looking to wind back the size of the balance sheet. Having the Fed going from known buyer to known seller is a clear USD negative in coming periods.

The reaction washout from the Fed was for the USD to be down as an initial spike on the headline drops – most likely down to the balance sheet news.

EUR/USD was volatile but is back above $1.09 to be $1.1040. It may have broken out of the Eastern Europe crisis crunch but time will tell.

GBP/USD finished at 1.314 after sliding to $1.304 it too has put the bears into a holding pattern.

USD/JPY however still follows the very strong relationship with US Treasury yields, which rose on the Fed decision. This saw the pair go from ¥118.30 to ¥119.12 its highest print since January 2016 it eased back to ¥118.75 but that is still strong momentum.

AUD/USD initially dipped to $0.7206, then joined the bounce heading all the way to $0.7378. The AUD remains one of the strongest currencies in 2022.

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