Fed spooks the market, UK politics in focus

A more aggressive Fed sent global stocks lower and the US Dollar to a 5-week high. Meanwhile, the pound tumbles in risk off-trade and as PM Boris Johnson’s future hangs in the balance.

• Hawkish Fed sends stocks lower, USD higher
• GBP falls as Sue Grey report awaited
• Brent crude reaches $90 per barrel

US markets ended broadly lower, Asia tumbled overnight and Europe is pointing to a weaker start after the Fed unnerved the markets yesterday. The US central bank kept interest rates on hold, as expected. They also indicated that the current bond buying programme will conclude in March, when policy makers will also start hiking interest rates. The Fed appears to be planning four hikes across the year in addition to launching a quantitative tightening programme, to reduce its enormous balance sheet. However, Fed fund futures show that the market is expecting as many as five hikes across the year.

In the press conference the Fed’s Powell adopted a significantly more hawkish stance, warning over persistently high inflation and ongoing supply chain issues. Powell has gone 180 degrees from a fairly relaxed outlook on “transitory” inflation, to a concerned and aggressively hawkish outlook in the space of a few short months.

The US dollar has been a clear benefactor of the more hawkish Fed, rallying to its highest level since November. Stocks, meanwhile, are taking a beating, though it was the Nasdaq that eked out a small gain on Wednesday. Non-yielding Gold is also taking a hit, having fallen 1.5% on Wednesday, trading at a weekly low at $1813.

GBP/USD falls to 2022 low

GBP/USD is trading at a monthly low on the back of Fed-inspired risk aversion, but also as political uncertainty mounts in London.  Sue Grey’s report on the numerous parties held at Downing Street during lockdown is expected to be released imminently, although the exact timing, and what details will be released is unclear. Should the report show that Boris Johnson misled parliament, the PM has said he will resign. However, even if the report shows him in a bad light, MPs could push the PM out of a job. Whilst the political uncertainty could cause some short-term declines in the pound, over the medium term the impact could be minimal given that Chancellor Rishi Sunak is the most likely candidate to fill Boris’s boots, which wouldn’t lead to any major policy changes or changes to the Brexit stance.

GBP/USD is testing support at 1.3430. A breakthrough here could open the door to support at 1.3375, the December 16 high.

Brent crude oil touches $90 per barrel

Oil prices rose to a fresh 7-year high in the previous session amid fears that geopolitics could disrupt supply, in an already tight market. Ukraine is a part of a crucial path for oil flows from Russia to parts of Europe. These flows could be affected should tensions escalate further or Russia invade Ukraine. Concerns over supply disruption come as supply in the oil market is already tight, as OPEC+ has so far not managed to lift oil production to the upwardly revised quota agreed back in July last year. The group missed its supply increase target in December.

Today, oil prices have eased slightly off that multi-year high on the back of the more hawkish Fed. The US Dollar rising to the highest level this year means that dollar-denominated oil becomes more expensive for buyers with other currencies, hurting demand. 

Despite today’s move lower, oil prices continue to trade within a steep ascending channel dating back to late December.