As expected by the market, yesterday’s US FOMC announced a 25bp rate hike. However, while it suggested the possibility of keeping rates unchanged (pausing rate hikes) at the next June meeting, it did not explicitly say so. Chairman Powell denied the speculation of an early start to rate cuts that had been spreading in the stock market and maintained a balance with inflation control measures.
The US stock market, which had been expecting mention of rate cuts, saw disappointment selling. In the foreign exchange market, the dollar was sold off as the hint of a rate hike pause approached. In addition, the yen strengthened further in the late NY session as Pacific West Bank shares plummeted. The background was that the bank was said to be considering strategic options, including selling itself. Risk aversion is heightened due to the continuous emergence of US financial uncertainty.
What about today’s ECB Governing Council meeting? The market was divided between expectations for a 25bp and a 50bp rate hike, but the majority now expects a 25bp rate hike due to recent financial uncertainty and tightening of bank lending in the ECB’s bank lending survey. The market will likely focus on the difference between yesterday’s US FOMC and today’s ECB. There are two points to note.
First is the timing of the pause in rate hikes. The ECB started raising rates late compared to the US and UK, and its response to inflation seems to be lagging. Inflation pressure, centered on core inflation, remains persistent. The market is currently expecting about 2-3 more rate hikes.
Next, how is the perception of financial uncertainty? In the US, there is ongoing talk of regional bank failures, and the market is quite concerned. On the other hand, in Europe, the issue with Credit Suisse has been temporarily resolved, and no specific names of financial institutions with management uncertainty have been mentioned since then. Can the ECB push through the longstanding perception that European banks’ management has become considerably more robust compared to the time of the Lehman shock?
If the above two points show a bullish stance, the euro buying and dollar selling movement may intensify. The interest rate announcement and statement at 9:15 pm Japan time, as well as the ECB President Lagarde press conference will be in focus.
What had a greater impact than the FOMC was the issue of the Pacific West Bank’s stock price plunging 60% due to a renewed crisis of bankruptcy. As a result, a large amount of USD came in, and it seems that JPY is currently being bought back as well. This led to the stop out of CHFJPY long positions. I was considering increasing my long positions, but I will wait and see.
Today, we’ll focus on the movement of the EUR after the ECB.
