Last week hosted an eventful week from FOMC members with speeches shifting markets lower and fulfilling trader’s bets of an aggressive Fed tightening program.
It is clear from the Fed’s perspective they need financial conditions to drastically tighten with Fed Chair Powell making that clear in his March press conference. This message failed to have a real felt effect on markets last week when the Fed minutes showed that due to the uncertainty presented by Russia-Ukraine we will most likely see a 50bps hike later this year with a 25bps priced in for the May rate decision.
As we know the Fed balance sheet and U.S equities have a direct correlation (shown below), so an aggressive tightening by the Fed can only lead U.S equities lower in the aftermath.
What does this mean for the dollar?
Bets are leaning towards a stronger dollar through the quantitative tightening process. Cable is expected to continue its decline against the dollar with the euro rate trading below the 1.0900 level not seen since March ‘22.
Today’s outlook:
This week CPI data for the U.S economy is expected to come in above 8% further adding to the pressure the Fed are under to battle this uphill slope. The UK GDP YoY and manufacturing data are set to come in this morning; manufacturing data will give a proxy of how the economy has faired amidst recent conditions.