Auhtor
Michael Hewson
Chief Market Analyst
CMC Markets UK
Fed minutes point to smaller hikes going forward, German IFO in focus
24.11.2022
06:35GMT Thursday 24th November 2022
Fed minutes point to smaller hikes going forward, German IFO in focus
By Michael Hewson (Chief Market Analyst at CMC Markets UK)
When
the Fed met back at the beginning of the month and raised rates by
75bps, a move which was in line with expectations, the statement leant
into a narrative that the central bank was aware that lags in monetary
policy might require a slower pace of hikes going forward.
This
wasn’t too much of a surprise given the number of hikes that have
already taken place. There was also concern about policy lags which
might require the Fed to slow the pace of hikes, and assess the effects
of what they’ve done so far.
The
markets liked the sound of this until we got to the press conference
and the Q&A with Powell got under way, and he deviated from the tone
of the statement by quite some way.
Last
night’s Fed minutes reaffirmed the initial market reaction to the Fed
statement earlier this month with most officials backing the slowing of
the pace of hikes soon, with several officials seeing risks from further
rapid hikes. This tone reinforces the narrative that 50bps is coming in
December with subsequent hikes likely to be between 25bps and 50bps.
That’s
not to say that members didn’t hedge those bets with an expectation
that rates might peak at a higher level than envisaged, to offset any
misconceptions that the Fed might be going soft, but for now markets
appear to be going with the smaller hike narrative, rather than the
Powell hawkish theme.
This
higher for longer narrative turned out to the bit of the minutes that
Powell decided to focus on in his press conference, pushing hard on the
point that the Fed would need to go higher and probably for a lot
longer, and which prompted the sell-off in equity markets and surge in
both the US dollar and in yields at the start of the month.
Those upward pressures have eased since then with the US dollar sliding back steadily to where we are now.
The
greenback had already been on the back foot leading up to the release
of last night’s minutes, and that weakness continued in the aftermath of
the release of the minutes, with US stock markets moving up to the
highs of the day, and the S&P500 testing its 200-day SMA.
Last
night’s positive US finish doesn’t look as if it will give markets here
in Europe a significant early leg up, with the FTSE100 feeling the drag
from further weakness in oil prices on the back of rising covid cases
in China, however trading is quite likely to be light in the absence of
the US for the Thanksgiving break.
The
euro also pushed through its recent highs above 1.0400 as well as the
200-day SMA, in a move that could herald further US dollar weakness.
As
we look ahead to today’s price action the latest German IFO Business
survey ought to reflect a similar uptick to the ones we saw in the flash
PMI’s yesterday, although business confidence is still expected to
remain weak.
The decline in energy
prices that we’ve seen over the past few months not only appears to
have prompted an improvement in economic
sentiment on the ZEW measure, but in yesterday’s PMIs as well, picking
up a touch from their disappointing October readings which fell to their
lowest since June 2020. The October IFO survey saw the business climate
fall to its lowest levels since May 2020, but crucially not below the
Covid lows. Today’s survey for November should see an improvement to 85
from 84.3
On
an expectations basis sentiment fell even more sharply and will be the
hardest measure to see any sort of rebound given that the mild weather
so far is likely to give way too much colder weather and a more
difficult energy price environment. Nonetheless this is expected to
improve to 77 from 75.6.
EUR/USD
– retested pushed above the 1.0400 and 200-day SMA area, with a clear
break above the highs this month at 1.0480, targeting a move towards the
1.0600 area. A break of support at the 1.0180 area retargets parity.
GBP/USD
– has moved through the 1.2000 area and looks set to test the 200-day
SMA at 1.2200. We have support back at the 1.1870 area.
EUR/GBP
– slipped down to the 0.8585 area, and through the trend line support
from the August lows, before rebounding. Continues to look heavy while
below the 0.8780 area. Next target is the 200-day SMA at 0.8530.
USD/JPY
– the failure to move through the 142.50 area has seen the US dollar
slide back below the 140.30 area, potentially opening a move back
towards 137.80 and the recent lows.
FTSE100 is expected to open 10 points lower at 7,455
DAX is expected to open 15 points higher at 14,442
CAC40 is expected to open unchanged at 6,679
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