Fed hikes rates; now it’s the BoE’s turn

European futures point to a mildly firmer start, tracking Wall Street higher, after the Fed hiked rates and as peace talks remain in focus. BoE is up next.

• Peace talks continue to make progress towards a cease-fire boosting risk sentiment
• The Federal Reserve raises interest rates by 25 basis points, as expected
• The BoE is also expected to hike rates by 25 basis points

European stocks point to a positive start to trading, continuing from an upbeat session yesterday. Optimism surrounding Russia, Ukraine peace talks continue to carry market sentiment, even as fighting continues on the ground. Reports that the two sides are moving towards a peace plan, which includes a cease-fire is enough to keep the markets buoyed and oil prices below $100, at least for now.

Fed

Overnight, the Federal Reserve, as was widely expected, raised interest rates by 25 basis points, taking the Fed funds rate to 0.5%. This was the first rate hike since 2018 and is set to be the first of many this year. 

The Fed’s closely monitored dot plot pointed to a further six interest rate hikes across this year, in line with market expectations but much higher than previously implied by the central bank. The aim is to bring inflation, which was 7.9% YoY in February, a 40 year high, back towards the Fed’s 2% target level. While geopolitical tensions are creating uncertainty, the Fed clearly feels the need to press ahead with hikes. Fed Chair Jerome Powell said that the economy was strong enough to withstand the rate raises, which has helped to boost sentiment, lifting demand for stocks. 

The FOMC upwardly revised its inflation forecast for 2022 to 4.3% from 2.6%, while downgrading GDP to 2.8% for this year.

USD/JPY

The US dollar continued to fall versus most of its major peers following the announcement, except the Japanese yen. USD/JPY rose over 119 after the Fed’s announcement, which emphasised the divergence between the Fed and the BoJ, which continues to support an accommodative monetary policy. The BoJ is due to announce its monetary policy decision on Friday, no change to policy is expected. 

BoE

Attention will now turn to the BoE, which, like the Fed, is widely expected to hike interest rates by 25 basis points, taking the primary lending rate to 0.75%, the level it was before the pandemic started. With the UK labour market showing strength, the unemployment rate low, GDP ahead of forecasts at the start of the year, and inflation at a 30 year high, the UK economy appears to be in a good place to accommodate another rate hike. However, the outlook is more concerning as the fallout from the Ukraine war is set to lift inflation and slow growth.

UK inflation rose to 5.5% in January and is likely to continue rising given the surge in energy prices amid the Ukraine war and Western sanctions. The BoE is expected to hike several times across the year, although the focus today will be on whether it’s a dovish (one or two more hikes this year implied) or hawkish rate hike (many more hikes this year implied).

GBP/USD

GBPUSD is rising for a third straight session heading towards the BoE rate announcement. The pair is extending its recovery from 1.31, pushing above 1.3150. A hawkish hike could see the pair re-take 1.32, while a dovish hike could bring 1.30 back into focus.