Fed sets tone – equities fall, USD rallies

As the dust settles from the June Fed meeting, European stocks are heading lower, easing back from record highs, and the US dollar is rallying.

As expected, the Federal Reserve kept monetary policy unchanged at its June meeting; however, it did surprise the market with a sudden hawkish shift. The US central bank now expects two interest rate hikes in 2023, up from zero in the last meeting. Even more significantly, seven policymakers out of 17 expect at least one hike in 2022. The Fed upwardly revised its growth and inflation outlook. In short, the Federal Reserve sees the US economy recovering at a faster pace than before, warranting an acceleration towards policy normalisation.

The markets had been toying with the idea of the Fed gradually starting to talk about tapering asset purchases. However, the hawkish punch came out of the blue.

The prospect of cheap money coming to an end hit US equities. All three major Wall Street indices closed lower on Thursday, and futures are pointing to an extension of those losses in today’s session. Interestingly, the tech-heavy Nasdaq closed -0.2%, outperforming the Dow (closed -0.77%), which is more closely linked to value stocks and cyclicals. This could add evidence to the idea that the rotation out of growth and into value has run its course and is starting to unwind.

In Europe, the FTSE is underperforming its major peers, with miners dominating the loser board. The stronger US dollar following the Fed’s curveball has pulled commodity prices southwards. Meanwhile, banking stocks are on the rise, encouraged by the prospect of higher interest rates and an increase in net interest income.

Airlines are also taking off in the hope that double-jabbed tourists will be able to skip quarantine. Currently, British tourists returning from Amber-list countries such as Spain, Greece, Italy and Portugal must quarantine for ten days. The current quarantine rules are putting most off travelling, so this shift in policy would be a game-changer for the airlines.

FX – US looks ripe for further upside, EUR under-performs

It should come as no surprise that the US dollar is outperforming today as it builds on yesterday’s gains. The accelerated timetable for rate increases is music to the ears of US dollar traders. As such, the greenback boasted its biggest daily climb since March 2020.

The US dollar looks comfortable holding its gains. Looking forward, the Fed is unlikely to remain as committed to its transitory inflation song. With some upbeat data, there is scope for further upside. Attention will now turn to US weekly jobless claims later today.

The euro is having a tough day. Despite better-than-forecast Core CPI data, the common currency is languishing more than its peers. Core CPI rose 1% YoY in May, ahead of the 0.9% expected. CPI hit 2% YoY, in line with forecasts and at the ECB’s target level.

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