Brace for turbulence

A hawkish tone delivered from the Fed minutes sent U.S equities lower at the close with investors facing fears that the Fed will act more aggressively than anticipated in order to slow down inflation. The Fed intends to reduce the balance sheet by $95 billion per month split between Treasury and MBS securities.

Although analysts priced in successive 50bps rate hikes by the Fed, the minutes presented a softer outlook. “Many” Fed officials wanted to see a 50 bps hike but due to the economic uncertainty presented by the ongoing war in Ukraine 25bps would be “appropriate” at this point in time.

What does this mean for the dollar and economy?

Crystal clear, further strength against all other G7 currency pairs. In the aftermath of the minutes we had spikes in both directions across major pairs, Tuesday’s speech from Gov Brainard seemed to have exhausted the dollar strength to the upside.

As the Fed is set to begin QT as early as May, the worry settling in amongst investors is how they will be able to impose enough slack in the labour market without causing unemployment levels to rise too high whilst not pushing the U.S economy into another policy lead recession. The possibility of a “soft landing” seems slimmer by the day; the difference being this inflation is not demand-driven inflation, it is supply-driven inflation so slowing down the economy still fails to solve the root problem.

Adding to further uncertainty the U.S and its allies imposed further sanctions on Russia for its military killing Ukrainian civilians. The outlook for the euro looks less and less positive as the war continues; analysts see the euro trading lower against the dollar just above the 1.0850 mark for the foreseeable future.