Federal Reserve hike rates to 16-year highs; Could the ECB spring hawkish surprise?
Oil giant Shell have revealed earnings of $9.65bn (£7.66bn) for Q1 2023, beating forecasts, as energy producers continue to post eye-watering profits. Shell’s adjusted earnings are higher than the $9.13bn it made in the first quarter of 2022 – when oil and gas prices surged after the invasion of Ukraine.
However, profits are lower than the $9.8bn it made in the final quarter of last year, following the recent drop in oil and gas prices from their highs last summer
Last night, The US Federal Reserve voted to increase interest rates to a 16-year high, even as a banking crisis has left the economy wobbling.
The 25 basis point rise in the Fed’s benchmark interest rate was the 10th hike since March 2022, when interest rates were zero and the Fed started its rapid inflation-fighting campaign. The interest rate now stands at 5% to 5.25%. Fed chair, Jerome Powell, has consistently argued that the central bank must prioritize bringing down inflation, which hit a 40-year high in the wake of the Covid-19 pandemic.
In a statement, the Fed said the banking system was “sound and resilient”. “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The committee remains highly attentive to inflation risks,” said the Fed.
New language in the statement did not rule out further increases for later in the year but did indicate uncertainty on the Federal Open Market Committee about the extent to which these would be necessary to bring inflation back to the 2% target.
The GBPUSD rate rose to a high of 1.2590 on Wednesday and remains near this level on during Thursday morning trade, as the previous days moves are held.
The USD has continued to trade at weaker levels during the Asian trading session following last night’s latest FOMC meeting. This has resulted in the dollar index moving back to within touching distance of the year-to-date low of 100.79 from last month. The GBP and CHF have already risen to fresh year-to-date highs versus the USD following last nights policy stance and subsequent forward guidance.
Lastly, the pound has come under pressure against the euro in May as investors have bet the Thursday European Central Bank (ECB) interest rate decision and guidance will see it maintain its crown as the most hawkish of the major central banks. Money market pricing is now showing investors are poised for 30 basis points of hikes at the ECB, which in effect means the market is split on whether it will deliver a 25 basis point move or 50bp.
The former (25bps) could possibly be a precursor for euro weakness in the immediate aftermath of the hike. The latter (50bps) would more likely result in euro strength and further outperformance. According to Global Macro Strategist at TGS, markets are still under-pricing the risks of a 50bps hike, and what could happen to the markets if this size hike comes to fruition.
The overwhelming expectation is for bias skews in favour of EUR upside, especially if the ECB surprises with a 50bp hike. The GBP/EUR rate would likely test the sub 1.13 level under such a scenario.
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