FOMC Looms as the Fed Tries to Tame Inflation.

AUD

The AUD has had an overwhelmingly weaker session despite finishing higher against the Pound, with inflation and upcoming FOMC meeting instilling fear into Aussie buyers. Asian equities were mixed on Tuesday with the Nikkei -1.3% and CSI +0.8%. There was carnage on the ASX in the first session after after the long weekend, opening down -5.0% finishing down -3.5%, its worst trading session since May 2020. Investors obviously spooked by fear central banks will lift interest rates more aggressively, slashing economic growth and companies’ profits. No noteworthy data out domestically or from China yesterday, however RBA Governor Lowe said it is unclear how far rates will need to go up, adding that inflation could hit 7% by Christmas. He continued saying it is ‘reasonable’ to think rates will reach 2.5% at some point. There will be raft of data out of China at 12pm today, where the economy is recovering from the Covid-19 shock in April, albeit at a mild pace. There is likely to be a contraction in Retail Sales whilst Industrial Production may rebound from easing logistics disruptions. The Unemployment Rate is another critical indicator for May, having rose to the second all-time high in April. On the Aussie front, investors are awaiting the release of the Employment data tomorrow.
 

USD

The AUD/USD testing lows seen earlier in May as fears of an extreme rate hike in the US continues to whip the Aussie Dollar, now trading at 0.6880. Wall Street was choppy throughout the day, though rallied slightly later in the session with the NASDAQ closing +0.2%, the S&P 500 -0.4% and the Dow Jones -0.5%. Last night’s US PPI print offered one last data point for the Fed to use when determining to raise rates by 50, 75, or even 100bps. However, the results of the print didn’t provide the markets with any new clues to help decide which it will be. US May PPI was 10.8%, a tick under expectations and unchanged from April’s print. In addition, the Core PPI for May came in lower than consensus at 8.3% vs 8.6% expected. The softer numbers offered little respite for the Aussie. The main event for the week with the whole world watching will be the FOMC meeting early tomorrow morning, with the Fed likely to hike the lending rate by at least 50bps. An updated summary of economic projections will also be published at this meeting and the dot plot should show a more hawkish profile in participant rate projections. Market focus may also be on the median inflation forecast which was revised higher at the March meeting. Chair Powell will hold a press conference following the decision. Also of importance, US retail sales data for May will be released shortly beforehand and are likely to show a moderate print relative to April’s strong reading (+0.9% m/m).
 

EUR

The AUD/EUR losing out significantly losing almost 1% overnight, trading at 0.66 flat at time of writing, though it did dip into 0.65 territory earlier. European Equity markets were also worse for wear as they drifted lower into their closes off the back of rate hike fears, the DAX and CAC taking losses of -0.9% and -1.2% respectively. ECB’s Knot said rates must rise by more than 0.25% in September if conditions remain the same, adding that he doesn’t expect the Euro area to enter recession. German June ZEW investor expectations rose to -28, from a previous -34.3, missing expectations of -26.8. Little reaction to the data as all eyes remain on the US for now.
 

GBP

The AUD/GBP was the only pair to move in a positive direction, trading as high as 0.5740 before easing back to 0.5731 at time of writing. The UK jobs data failed to impress the market, UK unemployment rose to 3.8% in the three months to April, as pay fell at the fastest rate in more than 20 years. The UK and BoE will get their turn in the spotlight later this week as we see the BoE release their interest rate decision. The odds of a 50 bp hike later this week edged up slightly, with the swaps market had 30 bps hike priced in at the start of last week. Yesterday, it edged up to 33 bp and now 35 bps. Nothing major to report on until then.
 

NZD

The AUD/NZD slightly off the boil but no major shift in tone as our fellow Antipodeans wait in anticipation of FOMC pressures, trading at 1.1063 this morning. New Zealand did release some poorer than expected data though it really takes a backseat to the looming inflation pressures. NZ Current Account – GDP Ratio dropped to -6.5% versus -6.3% expected and -5.8% prior. Further, the Current Account balance also depleted to $-6.143B compared to $-5.5B market forecasts. China lockdown fears are also hurting the Kiwi given its importance as a regional trade partner, as China continues to struggle to stamp out Covid-19 cases. Moving on, Quarterly GDP data released tomorrow morning will be the next point of focus from New Zealand.