• Fed hikes by 25bps, opens the door to a pause
• Dollar slides across the board
• Wall Street falls on Powell and Yellen remarks
• SNB delivers double hike, BoE to proceed with 25bps

The dollar traded lower yesterday and continued falling today as, despite delivering another 25bps hike, the Fed hinted that it is on the verge of pausing due to the recent turbulence in the banking sector.

Instead of noting that “ongoing increases in the target range will be appropriate”, they said that “some additional policy firming may be appropriate”. The word ‘may’ opens the door to the case of a pause as early as at the next gathering, and that’s why market participants were quick to assign a decent chance for inaction in May, despite the new dot plot still pointing to a year-end rate of 5.1%, meaning that rates could rise by another 25bps. According to Fed funds futures, investors are almost evenly split between no action and another quarter-point increment.

More importantly, they are anticipating a series of rate cuts in the next 8 months, seeing interest rates ending the year at around 4.15%. Therefore, apart from hints and comments on whether another hike is warranted, the focus may turn to any discussion around the possibility of rate reductions.

At the press conference following the decision, Fed Chair Powell said that before the turmoil, they thought that they would have to raise the terminal level. However, he also added that their mission is still to bring inflation down to 2% and that if they have to raise rates further, they will. Thus, should Fed policymakers start hinting at more hikes and push back against cuts, the US dollar could rebound. But if they start setting the pivot scene, the greenback may continue drifting south.

All three of Wall Street’s main indices jumped on the Fed’s pause hints, but they were quick to give back those gains and close well in the red as Fed Chair Powell said that at the end of the day, if they have to, they will raise rates further.

What may have also prompted investors to reduce their risk exposure were remarks by Treasury Secretary Janet Yellen, who said that the Federal Deposit Insurance Corporation (FDIC) is not considering ‘blanket insurance’, in other words guaranteeing all bank deposits, without congressional approval.

A lower dollar and a renewed slide in Treasury yields allowed gold to rebound from near the $1,935 zone. The metal looks to be headed towards the $2,000 zone again, the break of which could see scope for advances towards the peak of March 8, 2022, at $2,070, or the record high of $2,075, hit on August 7, 2020.

Today the central bank torch was passed to the SNB and the BoE, with the former already announcing its decision, and the latter expected to make it public in a few hours.

The SNB hiked by 50bps and noted that they can’t exclude more hikes in the foreseeable future. They also raised their inflation projections, which prompted market participants to price in a nearly 15% chance for another double hike in May, with the remaining 85% pointing to 25bps. This pushed the franc higher against its US counterpart, and it may continue to perform better should the divergence between SNB and Fed rate expectations persist.

As for the BoE, following the surprise jump in UK inflation, market participants are nearly certain that policymakers will raise rates by another 25bps today, while they are expecting two more such hikes before officials take the sidelines. Ahead of the CPI data, the market was split on whether a hike was warranted today.

Therefore, with the market now convinced that a quarter-point increment should be delivered, a potential hike on its own is unlikely to result in any reaction in the British pound. Pound traders may evaluate and adjust their positions based on signals and hints about the Bank’s future course of action.