Renewed Uncertainty Over Hawkish Federal Reserve
Uncertainty over the Federal Reserve’s hawkish rhetoric prevailed ahead of today’s release of FOMC minutes for March, when the central bank raised interest rate guidance by 0.25 percent. Investors expect more insights into the Fed’s QE tapering plans after years of asset purchases to support the economy through the pandemic.
Overnight sentiment in Asia took the lead from Australia’s equity markets which inched back as investors priced in the prospect of another major central bank – the RBA – turning hawkish. In its April decision, the RBA dropped its ‘patience’ guidance, signaling that one of Asia’s major economies would begin hiking interest rates in the short term.
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The shift towards monetary tightening in the US and Australia is mirrored in the UK. Inflation is running high in all three regions, pressured by reviving economic activity following the COVID-19 pandemic downturn. As industry overheats its engines in a struggle to meet rising levels of demand, supply-chain shortages are adding to price inflation.
High inflation and rising interest rates come at a challenging time for global debt which rose to record highs during the accommodative pandemic-era monetary policy.
Another sign of the times is volatility in crude oil spot prices as investors try to stay ahead of the next curve in the unpredictable course of the conflict in Ukraine. Geopolitical fallout has added to supply-side risks from Russia and OPEC has not given way on its plans to raise output gradually over the next quarter. Most recently, crude oil spot prices pulled back on the hopes of peace in Europe, in addition to US efforts to release its own oil reserves in order to counterbalance inflation.
Other than the FOMC minutes today, the next red-flagged trading event is on Thursday with the release of the Eurozone’s retail sales for February. There may be a domino effect on the EUR currency crosses if growth expectations are disappointed, but by the same token the bloc’s currency may be supported if the numbers are better than expected. The EUR exchange pairs also face headwinds stemming from uncertainty over upcoming elections in France during April.
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