US Open Note – Pound crashes on dovish rate hike; Wall Street eyes bearish open



Pound crashes after BoE policy decision

The Bank of England stuck to its March guidance, confirming expectations of a 25bps rate hike to 1.0% on Thursday although three out of nine board members surprisingly voted for a sharper 50bps increase. Its inflation projections for the current year moved up to 10% on the back of higher household energy prices and projected additional rises in October, while its growth estimate is now warning a dip slowdown over the next year as disposable income is forecast to fall nearly by a record rate amid the Ukrainian war.

Nevertheless, the central bank judged that boiling inflation requires “some degree of further monetary tightening in the coming months", but plans for bond selling will remain subject to economic conditions until the next update at the August meeting.

Sterling immediately erased its post-FOMC bounce, plunging by 1.7% to a fresh 2-year low of 1.2394 against the dollar. Euro/pound soared above the 200-day simple moving average to print a new 2022 top at 0.8520, while pound/yen crashed to a weekly low of 161.00.

Euro on the back foot as well

Meanwhile in the Eurozone, the ECB’s executive board member Fabio Panetta struck a far more cautious tone following some discouraging factory data out of Germany, stating that the region's economy is "de facto stagnating", but negative interest rates and net asset purchases will no longer be necessary. A few minutes later, the central bank’s chief economist Philip Lane sounded confident about sequential rate increases as well, but he questioned the exact timing, reflecting divisions about a July rate hike within the central bank.

Euro/dollar has partially retracted yesterday’s upturn to 1.0560 after hitting resistance at 1.0640.

US initial jobless claims increase but the dollar is the king

Elsewhere, the weakness in European currencies bode well for the king dollar. The world’s reserve currency is again outperforming a basket of six major rivals, remaining close to its recent multi-year high of 103.92 even though Powell ruled out the case for a jumbo 75bps rate hike in the coming months and telegraphed a potential economic downturn.

In data releases, initial jobless claims for the week ending April 30 rose marginally to 200k for the first time since the end of March compared to 180k expected, though that is still a decent reading and with the Ukrainian war expected to weigh more on Europe and Asia, the US economy could still attract a relatively greater amount of fund inflows, preserving a strong support under the greenback.

Yet, how far the rally in dollar/yen could go is still a question. With the pair trading near its recent two-decade high and ongoing optimism for additional bullish extensions, investors are wondering which level could prompt BoJ intervention. Japanese analysts are pointing to 140.00, but for now that is still a long way up.

Wall Street opens moderately lower

Turning to stock markets, futures tracking the S&P 500, Nasdaq 100 and Dow Jones foresee a gloomy start to the US trading following yesterday’s cheerful bounce, with tech stocks expected to lead losses as investors assess the Fed’s tightening strategy and its implications on economic growth. That contradicts the 1.0% relief in the pan-European STOXX 600 and the 1.5% bounce in the British FTSE 100, which managed to peak at a two-week high despite the BoE’s gloomy outlook.

OPEC+ sticks to moderate supply increases

Finally in commodities, crude oil prices are enjoying another bullish day as OPEC+ agreed to a moderate supply increase once again, citing a potential demand slowdown from China’s lockdowns. The group has ignored calls for accelerating output increases from Western nations, as well as EU’s plans to embargo Russian oil imports. Perhaps resurfacing tensions with Russia is something the group would like to avoid at the moment.

WTI oil futures accelerated beyond $111.00/barrel, opening the door to the key $114.39 resistance.

In metals, gold is also in the bullish camp, rising for the third consecutive day, though the key resistance zone of $1,915/ounce – $1,924 is now a short distance away.

 

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