Major Central Banks Are Expected to Follow the Fed | Daily Market Analysis

Key events:        

• Switzerland - SNB Interest Rate Decision (Q1)    
• Switzerland - SNB Press Conference     
• Eurozone - EU Leaders Summit       
• UK - BoE Interest Rate Decision (Mar)
• UK - BoE MPC Meeting Minutes     
• USA - Building Permits  
• USA - Initial Jobless Claims
• USA - New Home Sales (Feb)

Contrary to the recent problems in the U.S. banking system, the Federal Reserve did raise interest rates by 25 bps at its meeting last night.

While this was broadly in line with expectations, the change in the statement was seen as more dovish, softening the language by removing the reference to "further rate hikes would be appropriate," and replacing it with "some additional policy tightening may be appropriate.

This gives the Fed an opportunity to pause at the next meeting, data permitting, and also indicates that the end of the rate hike may be just around the corner.

The change led to a sharp drop in yields as well as the U.S. dollar, but U.S. markets also fell after the initial rise and closed lower after Treasury Secretary Janet Yellen said in separate comments to U.S. lawmakers that there was no obligation to expand bank deposit insurance beyond the current $250,000 limit.    

Powell also acknowledged that a pause in rate hikes was being considered in the wake of the banking crisis, but said the prospect of lower rates this year was not being considered. A cursory analysis of the latest dot plot confirmed this thought, even as markets continued to evaluate such a possibility.

For stock traders, the combination of a 25bp rate hike, a hint of another 25bp hike, and the risk of credit tightening proved too much to cheer about. The S&P 500 is down 1.65%.

However, the bond market took a different view of the Fed's latest decision. U.S. 2-year bond yields fell despite Powell's insistence that tightening may not end because "inflation is still too high."

Moreover, markets continue to forecast a 100bp rate cut before the end of the year. The gap between the dot plot and market prices has widened, once again raising the confidence issues that Powell is facing at the moment.

And activity in Fed funds futures suggests that there is no more than a 35% chance of another 25bp rate hike after Powell's comments.

In other words, traders don't have much faith in Powell. And his job just got harder as financial stress added to the headaches over inflation.

The U.S. dollar index fell after yesterday's FOMC decision, along with yields.

The sharp drop in the dollar led to a strong rally in the EUR/USD yesterday. The pair overcame the 1.0910 level as European Central Bank (ECB) President Christine Lagarde reiterated a couple of hours before the Fed decision and Powell's speech that the ECB will take a "tough" approach to respond to inflation risks and that the 2% inflation target is non-negotiable.

Today is a fairly quiet day in terms of data releases so the focus remains on central banks with a number of monetary policy announcements planned and some ECB speeches.

The first to announce its decision will be the Swiss National Bank and despite the turmoil in the country's banking system, expectations, and consensus are that it will raise its policy rate by 50bp to 1.50%.

Norges Bank is next, and analysts expect a 25bp rate hike to 3.00%, which they have already hinted at several times.

The Central Bank of Turkey's rate decision is also due today, the market consensus is "hold".

Finally, we expect the Bank of England to announce the latest 25bp rate hike in the afternoon, bringing it to 4.25%. After yesterday's surprise in the form of higher inflation, markets are also more confident, and the rate hike is completely a foregone conclusion.