Week Ahead: Fed to go large, but by how much?

Updated September 18, 2022

It’s an incoming feast of central bank meetings this week. The FOMC, Bank of England, Bank of Japan and Swiss National Bank all release interest rate decisions. The Fed meeting stands out as they are expected to carry on with jumbo-sized rate hikes. The chances of a “hike of the century”, that is, 100-basis points, is also not out of the question.

After last week’s blockbuster US inflation data for August and a consistent chorus of hawkish Fedspeak, the market favours another 75-basis point rise. A mega-hike of 1% is currently given around an 18% probability. Critical for assessing what happens after this meeting will be the FOMC’s updated forecasts and the Fed funds rate for 2023 and 2024. If policymakers are relatively sanguine, the current peak in the terminal rate for Fed funds may head towards 5%. This would most likely push the dollar to new highs and see equity markets, especially growth stocks, sell off sharply. Last week’s breakdown in gold would also be confirmed.

The re-arranged Bank of England meeting takes place ahead of a mini-emergency Government budget in the UK on Friday. Markets are currently sat on the fence between the chances of a 50-basis point and 75-basis points rate rise. How will policymakers view the government’s recently announced energy support package?

It raises inflation in the medium-term given it reduces recession risks, thereby requiring more BoE rate hikes. Sterling could find a semblance of support in this scenario, though the growth outlook will still remain highly uncertain. GBP/USD traded below 1.14 against the dollar for the first time since 1985 last Friday and remains technically bearish.

Major risk events of the week

21 September 2022, Wednesday:

FOMC Meeting: Does the Fed really raise rates by 1% at a single, non-emergency meeting? Rates are currently in the range of 2.25%-2.5%. The terminal rate in the US now stands at 4.4%. All eyes in the build-up to this meeting may be on the WSJ journalist who leaked the bigger-than-expected 75bp rate hike in June. Real interest rates are at cycle highs already at around 1% so a “hike of the century” seems unwarranted. Support in EUR/USD sits at 0.9952 and then the cycle low at 0.9863.

22 September 2022, Thursday:

Bank of Japan Meeting: Markets will focus on talk around FX movements given recent chatter from officials. Monetary policy remains ultra-accommodative compared to the rest of the world who are raising rates to combat surging and sticky inflation. USD/JPY failed around 145 last week as the Japanese authorities stepped up intervention talk, so that is major resistance.

SNB Meeting: Most expect a 75bp rate hike in line with other major central banks. The August inflation rate stood at 3.5%, above the 0-2% SNB target. The Swiss franc’s real exchange rate has remained stable in recent months, so analysts say there are no fears about a strong CHF.

Bank of England Meeting: Markets currently price in around 67bps of tightening. A half-point hike would take rates to 2.25%. The government’s energy price cap measures are likely to lower CPI in the near term and reduce the risk of a recession. But GBP weakness may worry the hawks.

23 September 2022, Friday:

Eurozone PMIs: The manufacturing survey is expected to drop to 49.1 from 49.6 in August. Services PMI is also seen falling, to 49.2 from 49.8. Analysts say that broad-based weakening in demand is becoming an increasingly prominent risk for the eurozone.

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