In our FX review this week, we take a look at the important central bank meetings and what it means for the USD (US Fed) and GBP (Bank of England) in particular. We also talk about how risk sentiment seems to be improving as negotiations continue in Ukraine.
The US start the process of hiking
First up this week was the US Fed meeting on Wednesday. As we noted last week, the greenback was already very strong going into the meeting, due to the safe haven flows from Ukraine. Therefore, we struggled to see how USD could gain further, unless the Fed really shocked the market.
As it happened, the dollar weakened modestly after the meeting, with little impact to the market. The 25bps rate hike was expected, and although some though that a 50bps hike was due, this didn’t materialize.
However, we do think that some have overlooked the future expectations of more raises from the Fed this year. The dot plot consensus from committee members showed 6/7 more hikes in 2022. This is quite aggressive, and should prevent the dollar from weakening significantly over the course of the year.
Bank of England also hikes
On Thursday, the Bank of England also met, and continued the process to hike rates by another 25bps, putting the base rate at 0.75%. However, in a divergence from the Fed, the committee pulled back expectations of more hikes this year. They stressed that only modest tightening of policy (aka more hikes) could be needed.
This caused GBP to slump as investors got spooked that their previous expectations were misplaced. From our point of view, we think the bank will still have to raise rates several more times this year to counteract inflation. New guidance shows that inflation could hit 8% in the spring, and so we actually like to be long GBP on this dip.
In our portfolio (that you can copy here), we went long GBPCHF, to add to our existing long GBPUSD position.
Ukraine risk seems to be reducing
In more positive news this week, negotiations between Russia and Ukraine have been making progress. This has supported equity markets and also has meant that risk currencies such as AUD and CAD have done well. It has also allowed EUR crosses to stem losses, with EURUSD finding a new range anchored around the 1.1000 handle.
We continue to think that the situation is very fluid and so won’t be putting on any large positions in the coming week that could be unduly impacted by a sudden change due to headlines.