Daily Market Outlook, May 5, 2022

Overnight Headlines

Asian equity indices are mostly higher following yesterday’s US Fed policy update. As expected, interest rates were raised by 50bp, the largest increase since 2000, while the start of balance sheet reduction in June was confirmed. Chair Powell indicated that further 50bp rises at the next two meetings in June and July were ‘on the table’ which would bring the top end of the range of the Fed funds rate up to 2%. The rally in risk sentiment in late US trading appeared to result mainly from Powell playing down the likelihood of 75bp increases. Elsewhere, the impact of China’s zero-Covid policy was evident in the Caixin services PMI which plunged to 36.2 in April.

Today’s focus is the announcement of the Bank of England’s monetary policy decision at midday, followed by the press conference with Governor Bailey. A fourth consecutive increase in interest rates seems to be on the cards. We expect the majority of the nine-strong Monetary Policy Committee (MPC) to vote for a further 25bp increase in Bank Rate to 1.00%, taking it to its highest since 2009, although we suspect that some members may prefer different courses of action. Updated economic projections in the Monetary Policy Report are likely to see a lift in the BoE’s near-term inflation forecasts which could prompt some members of the MPC – notably Catherine Mann and/or Michael Saunders – to seek a more rapid pace of tightening. However, on the flip side, at least one member – most likely Deputy Governor Cunliffe – may vote against a hike, just as he did in March.

Such divergence in views highlights the difficult balancing act facing central banks in setting policy in the current environment (slower growth and high inflation) that continues to make plotting the likely path of policy uncertain. The BoE’s latest set of economic projections will factor in its assessment of the impact of the war in Ukraine, which should add a downside skew to GDP growth projections.

Meanwhile, despite the probable higher near-term inflation forecast, the BoE’s longer-term projections seem likely to be cut. With the latest forecasts set to be conditioned on a higher market-implied path for UK interest rates as well as a weaker growth outlook, the BoE will probably now project an even bigger undershoot of the inflation target in three years’ time. That would be an indication that current market pricing for interest rates to rise to at least 2.25% by the year-end is excessive. Expect the Committee to maintain a cautious message regarding prospects for further tightening.

EUR/USD: 1.0500-10 (1.6BLN), 1.0570-80 (810M) 1.0600 (1.8BLN), 1.0675 (290M), 1.0750-55 (1.0BLN) 1.0765 (600M)
USD/JPY: 128.00 (410M), 130.70 (395M)
GBP/USD: 1.2550 (502M), 1.25890 (320M), 1.2700 (392M)
AUD/USD: 0.7000 (516M), 0.7030 (343M), 0.7135 (393M)
USD/CAD: 1.2615 (280M), 1.2865-70 (513M) 1.2880-90 (761M), 1.3075 (1.2BLN), 1.3100 (2.6BLN)
USD/CHF 0.9700 (230M)

EURUSD Bias: Bearish below 1.0950 Bullish above

Consolidates post – Fed gains in quiet Asian session
EUR/USD opened +0.98% at 1.0622 after late rally due to Powell comments
It eased to 1.0604 early Asia before finding buyers ahead of 1.0600
It hipped back up to 1.0642 before settling unchanged at 1.0620/25
The 10-day MA is at 1.0603 and another close above that reading solidifies support
Resistance is at the 21-day MA at 1.0727, which should be stiff resistance
Bids tipped 1.0575/80 and a break below would shift pressure to the downside
Trading in Asia was quiet due to Tokyo holiday
EUR/USD may consolidate ahead of US non-farm payrolls Friday