Bloomberg News has dubbed today “Manic Monday” as the global rout of equity markets has accelerated.
Overview
Markets sold off on Friday following a report that showed that inflation has not peaked and has intensified.
Equity futures are awash in red as traders have increased bets that the Fed will have to hike interest rates by 75-basis points instead of 50-basis points. The Fed concludes its two-day meeting on Wednesday. It is still our view that a 50-basis point hike is the most likely outcome. However, we cannot ignore the real possibility the Fed will find the scope to be more aggressive. If the Fed hikes rates by 75 basis points, it would be the first time since 1994.
The Bloomberg Dollar Spot Index is at the highest level since April 2020. There is no major economic data on today’s docket. There are also no Fed speakers ahead of the two-day meeting, which concludes on Wednesday. Therefore, expect the dollar to continue to test fresh highs against a number of its rivals as stocks and cryptocurrencies continue to plunge.
What to Watch Today…
- No major economic events scheduled for today
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GBP
The sterling is also getting pounded this morning, losing another full percent against the greenback. Fresh data highlighted a struggling economy. The U.K. economy shrank in April at the fastest pace in a year, slipping 0.3% from March. The print missed an expectation of a modest 0.1% advance, pointing to possibly a broader contraction.
The recent string of poor data is putting pressure on the Bank of England to be more cautious in fighting inflation. It is widely expected that the Bank of England will raise rates by a quarter percentage point on Thursday. The widening divergence in monetary policy between the BoE and the U.S. Fed will be on full display this week, adding downward pressure on GBP/USD.
JPY
The Japanese yen briefly reached its weakest level since 1998 overnight versus the U.S. dollar. The yen has since gained nearly 1% after Bank of Japan Governor Haruhiko Kuroda verbally intervened in currency markets. He said that the weakening yen is undesirable and negative for the economy.
The Bank of Japan will coordinate with the government to “watch” the impacts of foreign rates on markets. While the Bank has not physically intervened yet, today’s events are notable as this is the first time that Kuroda publicly commented on the yen’s weakness.