Home Daily Commentaries Fed hiked its overnight rate; expect an extra 100 bps by the end of the year

Fed hiked its overnight rate; expect an extra 100 bps by the end of the year

Daily Currency Update

It happened again yesterday: the Fed increased their overnight rate by 75 bps towards 3.25% as expected. However, they hinted that an additional 75 bps rate hike will happen in the November FOMC meeting, followed by another 50 bps rate hike at the December FOMC meeting. Therefore, we might have a range of 4.25% to 4.5% at the end of this year. The hiking cycle expectation was previously lower than this, which is why the stock markets plunged and the US dollar index (DXY) increased to a 20-year and four-month high (since June 2000). At the same time, the EURUSD pair fell to a new 20-year low to 0.9809, the AUDUSD fell to a two-year and four-month low of 0.6574. The USDCAD increased to a two-year and two-month high of 1.3544. The three pairs mentioned above are trading at 0.9844, 0.6640, and 1.3484, respectively, at the time of this writing.

Jay Powell delivered an unambiguous message that the Fed is ready to take interest rates higher to address inflation risks in the near-term, which will weigh on asset valuations and tighten financial conditions. For instance, US mortgage rates have climbed to the highest level since 2008, with the average 30-year fixed-rate home loan reaching 6.25% last week. The Fed will continue to step on the brakes.

Key Movers

Japan intervened to support the Yen after its first fall since 1998 after the Fed ramped up its hiking rate cycle and strengthened the USD. The USDJPY fell (strong Yen) towards an intraday low of 140.36 at the beginning of the North American session from 145.9 at the beginning of the European session, which is an almost 4% move within a few hours. It trades at 142.31 at the time of this writing. Masato Kanda said the Japanese government was taking, “...decisive action early today.” The truth is that this intervention shows that Prime Minister Fumio Kishida’s government has reached the limit of its patience after seeing the Yen fall ~ 21% versus the US dollar in 2022 (YTD).

A range of other central banks have hiked rates by 50-75 bps over the last 24 hours. The Bank of England hiked its rate by 50 bps as expected. After some choppiness, the Cable trades flat at 1.1269, and the UK yields are losing the initial push to the upside. The BoE rate sits at 2.25% at the moment.

The Swiss Franc fell the most since 2015 against the Euro after the Swiss National Bank’s 75 bp interest-rate hikes did not satisfy market participant expectations. The EURCHF trades at 0.9640, up 1.4%, and the USDCHF trades at 0.9789, increasing 1.3%. The Swiss Franc is very weak today because many market participants had bet on a more aggressive SNB, so they are unwinding EUR and USD shorts against CHF.

Expected Ranges

  • EUR/USD: 0.9811 - 0.9898 ▼
  • GBP/USD: 1.1222 - 1.1347 ▼
  • AUD/USD: 0.6577 - 0.6690 ▲
  • USD/CAD: 1.3372 - 1.3542 ▲