Today is set to be a wild day in financial markets— U.S. futures are up, and the dollar is down slightly, reversing some of yesterday’s moves.
Overview
Markets are now fulling pricing in a 75-basis point interest rate hike by the Federal Reserve at the end of their two-day meeting at 2:00 pm. A 75 bp hike would have seemed impossible only a week or so ago, but data released since then has shown inflation remains unchecked. The last time the Fed raise rates 0.75% was 1994.If the Fed, instead, decides to stick to a 50-basis point hike, then equity markets will likely rally, and the dollar will fall. This outcome has become less likely over the past few days. Following the decision, Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 pm. Traders will hang on every word as we try to price future interest rate hikes correctly. Expect a highly volatile afternoon.
On the fundamental front, the U.S. economy got more bad news this morning. U.S. May retail sales fell 0.3%, missing estimates of a modest 0.1% uptick. The so-called “core” reading, which strips out volatile sales of autos, rose 0.5%, also slightly missing forecasts.
What to Watch Today…
- Interest rate decision at 2pm, press conference 2:30pm
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EUR
The common currency has experienced heightened volatility overnight. The Euro and European equities initially popped higher on the news that the European Central Bank called an emergency session. The rally proved to be short-lived, however. The ECB fell short of initial expectations and was light on plans for immediate action. The Euro has fallen nearly a full percent over the last hour and is now trading at ranges seen yesterday.
GBP
The Canadian dollar gained against the U.S. dollar for the first time in six days overnight. However, the loonie has since given up most of those gains as the greenback is modestly rebounding across the board. The Canadian economy received mixed news this morning, pulling the currency in opposite directions. Housing starts rose more than forecast in May. However, in May, home sales fell 8.6% month over month. Sales are down 21.7% year over year, highlighting a drastic decline. It is our view that movements in USD/CAD will be at the mercy of the Fed decision this afternoon.
