It's the day before the FOMC decision where the last 24 hours has seen a ratcheting up of the expectations to 75 basis points to 1.75% from a 50 basis point hike expected just yesterday. The question traders will be most interested in is "will the Fed commit to another 75 in July?".

Although, the Fed probably wishes they did not have to do this given the extreme uncertainty, but they will also be releasing expectations for inflation, GDP and employment, as well as the dot plot for rate expectations at the end of 2022, 2023 and 2024.

At the last meeting the Fed saw the Fed funds rate at 1.9% at the end of 2022 and 2.8% at the end of 2023. If the Fed commits to 150 BPs over the next two meetings, they will have reached 2.5% by July with 3 additional meetings to go. The market is pricing in 275 bps to the end of 2022, which would take the rate to 3.75% - well above the neutral rate. The market is also pricing in a terminal rate in 2023 of about 4.1%.

So if correct, the heavy work will be done in 2022, then the question is "how hard a landing will the economy have as a result?".

Needless to say, forecasting GDP, inflation, and employment will not be fun either. However, in March, the central tendencies for each key economic release at the end of 2022 showed:

  • GDP at 2.8%
  • Unemployment at 3.5%
  • PCE at 4.3%
  • Core PCE at 4.1%

My guess is inflation will be higher, growth will be lower and unemployment will start to tick back higher. What is your guess?

What about 2023?

My expectations is for the Fed to fit in the numbers to fit as positive story as possible given their rate projections. I am pretty sure the Fed won't be putting in a negative GDP, and I hope they would think inflation would be back to trending lower (in the 2%s from something quite high in 2023) given the sharp rise in the dot plot.

In preparation, the market today saw yield continue to trend higher and the dollar follow in the same direction.

Looking at the treasury curve, if the funds rate is going to 3.75% by the end of the year according to the market, a yield of 3.435% today may still be low. Nevertheless, it is up an additional 15.4 basis points today after rising a similar amount yesterday. The longer dated treasury yields were also higher but by lesser amounts as the 2-10 year spread moves closer to inversion once again. An inverted yield curve is said to be a precursor to a recession.

US yields
US yields surge and the yield curve flattens

Looking at the strongest to the weakest of the major currencies, the EUR just nudged out the USD for the strongest of the majors although, the difference was modest. The weakest was the GBP which saw the pound fall for the 5th consecutive day.

The BOE will follow up the FOMC meeting tomorrow, with a meeting of their own on Thursday where the expectations are for a 25 basis point hike.

The strongest to the weakest of the major currencies

Looking as some of the big movers today:

  • GBPUSD. The GBPUSD fell and closed the day below the 1.2000 level for the first time since March 2020. Going back to March 2020, the pair had a corrective high of 1.19328 on March 20, 2020 and a swing high on March 26, 2020 at 1.19724. The low price today reached 1.19331 just above the lower of that extreme. Move below those levels and traders will start to look toward the 1
GBPUSD closes below 1.2000

USDJPY: The USDJPY sellers tried to push the USDJPY below it's 100 hour MA yesterday and again today but with limited success on the break (about 6 hourly bars saw the price trade below the 100 hour moving average). After finding support against the 100 hour moving average in the early New York session, the price started to move higher, especially as yields also moved to the upward direction. By the end the day, the price had moved above the high from yesterday (which was a new 20 year high) and also moved above the January 2002 swing high at 135.16. The high price today reached 135.47. That took the price to the highest level since September 1998. He will now take a move back below 135.16 level to give the sellers the smallest of victories on the failed break to the upside.

NZDUSD; The NZDUSD cracked below the low from May at 0.62122, and in the process traded to the lowest level since June 2020.. The price also moved below the 61.8% retracement of the move up from the 2020 low. That level comes in at 0.62298. Getting above the May low and the 61.8% retracement is needed to give buyers some hope (but the price needs to stay above those levels). Absent that, and the downside remains the dominant direction. The pair has now been down for 8 consecutive days.

In other markets today:

  • spot gold fell $12 or -0.66% at $1807.80 as it reacted to the higher dollar
  • spot silver close near unchanged
  • crude oil give up early gains and close down $1.90 at $119.02
  • bitcoin fell to a low of $20,819, but is trading around $22,035 near the 5 PM close