Investors are holding their breath before today’s FOMC decision. The Federal Reserve (Fed) is expected to raise the interest rates by 50bp for the first time in two decades, and start reducing its balance sheet by $95 billion per month to tame the rising inflation in the US.
While the 50-bp hike is fully priced in, there is a chance for the Fed to get more aggressive and hint at a 75bp hike in a future meeting, despite the economic indicators that start showing signs of slow down.
US jobs
The latest jobs data will throw light on what happened in the US jobs market in April. Due today, the ADP report is expected to print 395K new private job additions last month, and NFP data, due Friday, is also expected to add near 400K near nonfarm jobs.
The strong recovery trend in US jobs market also means that the weakness in the latest GDP read is unlikely to change the Fed’s tightening plans. The Fed knows that the monetary policy will be paralyzed if inflation remains significantly above the policy targets. Therefore, the US policymakers will remain focused on the inflation battle for the coming quarters, in the expense of growth.
Dollar strength
It is, of course, not a surprise that we see the US dollar continue strengthening. The US dollar index rallied to near 104 mark last week, as besides the tighter Fed expectations, the safe haven flows support the greenback in the actual high economic and high geopolitical risk environment. Plus, the US position as a net energy exporter gives a further boost to the greenback as oil prices remain elevated.
The EURUSD hit the 1.05 mark on the back of a solid divergence between the Fed and the European Central Bank (ECB) expectations. Given the pricing around the hawkish Fed expectations, we may see some profit taking in long US positions after today’s FOMC announcement, yet a further advance toward parity in EURUSD is what the bears will likely be targeting next.
Oil
We haven’t seen a significant fall below the $100pb in US crude, and the risks remain tilted to the upside as the European nations now consider walking away from the Russian energy, before Russia cuts its energy supply them, after it turned off the tap for Poland and Bulgaria.
This week’s OPEC decision will be no relief, as the cartel is not planning to increase production by more than 432K barrels per day, as planned. Moreover, the latest reports suggest that the member states couldn’t even meet their actual production target due to capacity constraints, operational disruptions, and lower investment.
The only ‘hope’ is to see the Chinese lockdown, and broader economic slowdown due to China disruptions, and tighter financial conditions weigh on oil demand and pull prices lower in the coming quarters.
