It’s increasingly clear that the Fed is now in the middle of one of the most-rapid tightening cycles ever. For next week’s meeting, the market now sees an 18% chance of a 75 basis point hike with at least 50 bps as a certainty.

Just a few weeks ago there was talk about a pause after another 50 bps hike in July but now at least 50 bps more is priced in for September with more beyond.

Here’s the most likely path, as implied by Fed funds futures:

June 15: 50 bps to 1.25-1.50%

July 27: 50 bps to 1.75-2.00%

Sept 21: 50 bps to 2.25-2.50%

Nov 2: 50 bps to 2.75-3.00%

Dec 14: 25 bps to 3.00-3.25%

That would be a cycle of five straight 50 basis points hikes (including last month) with the Fed trying to get back ahead of the curve. Into 2023, hikes continue to be priced up to 3.50-3.75% at this time next year.

CIBC boosted its baseline by 25 bps today but still thinks what the market is pricing is too much, and the way markets are tumbling, they may have a point.
Total annual inflation is set to remain elevated for longer, given the rise in oil prices and the
continued pressure on food supply chains. While core annual inflation could still decelerate in June, that will reflect base
effects. We’ll need to see an unwinding of supply chain issues and a slowdown in shelter costs to drive inflation closer to
target, and this data suggests that the Fed will want to get rates up a bit sooner, and a quarter point further, than our prior
forecast. Four 50 basis point hikes this year will take the ceiling for the funds rate to 3%, but unlike market expectations
for further hikes, we expect that to produce enough of a growth slowdown to quell inflation in 2023.
At this point, the top is unknowable but anyone looking to hold any kind of risk trade needs to shelter themselves against a storm in rates.

This article was written by Adam Button at www.forexlive.com.

It’s been seven terrible weeks for most global financial markets but seven straight weeks of gains in crude oil.

WTI finished down by 84-cents on Friday but climbed $1.80 on the week. It’s the highest finish to a Friday since 2008.

Earlier this year oil spiked as high as $130.50 when the Ukraine war broke out but it was a short-lived spike and finished that week at $109.33.

The latest rally has come on signs of persistent shortages despite Chinese lockdowns, more OPEC supply and the SPR release. The next challenge is the risk of rapidly-slowing global growth amidst higher rates.

So far though, crude has passed all the tests and technically, not much stands in the way of a return to $130.

Even today with all the bearishness in stocks and bonds, the 0.7% decline is hardly material. WTI fell as low as $118.33 but rebounded more than $2 from the lows.

For the weekend, two spots to watch are Libya and Norway. In Libya, rebels are threatening to block another port while in Norway workers could announce a strike.

Demand destruction is likely creeping in; in part because gasoline and diesel prices are even-higher than they should be, because of refinery problems. Yesterday, US retail gasoline prices hit $5/gallon on average nationally for the first time.

This article was written by Adam Button at www.forexlive.com.

• Inflation is unacceptably high
• Fiscal policy will need to remain supportive

He’s one of the few to at least make mention on fiscal policy at least. As much as the ECB thinks it is doing work, government policies are where the heavy lifting really is when it comes to the inflation battle.

This article was written by Justin Low at www.forexlive.com.

Earlier in the day, oil dropped on demand worries as China continued to flip the on-off button on lockdown restrictions. A new flare-up in cases in Shanghai is presenting lockdown concerns and WTI crude fell to near $120.00 in Asia trading.

But buyers held on near the figure level, alongside the 100-hour moving average at $120.27 at the time, before pushing back higher in European morning trade. WTI crude is now up $1 or 0.8% to $122.50 at the highs for the day:

At this point, I feel like I’ve been writing this same headline one too many times already. I don’t want to keep beating a dead horse but it is remarkable that oil has managed to stay as resilient as it has in the past two months. The bullish case is certainly frightening if you consider the headlines that oil has braved through in recent weeks.

My points from last month (when prices were at $107):

„I think one key argument that not many people are raising is that there continues to be a shortage in supply and the situation is likely to get worse amid the supposed transition to green energy. The fact there is underinvestment in the sector and falling inventories continue to allude to a tighter market in general.

„Throw in the fact that Russia supplies are being phased out with little to no immediate substitutes, the tighter market outlook is going to stay for longer. The capacity shortage and the fact that OPEC+ is also not doing much more than they are now isn’t going to help alleviate sentiment on that front either.

„When you weigh up those factors and see how resilient oil prices have been as of late. It’s rather scary to imagine where prices might end up once we get over this hump.“

This article was written by Justin Low at www.forexlive.com.

The hot topic in Europe right now is the rise in fragmentation risks and how the ECB is letting that slide – at least for now – with the central bank likely to struggle to find a solution as it prepares to raise rates for the first time in over a decade in July.

Italian bond yields have jumped since the ECB policy decision yesterday and the selloff is hitting local stocks – banks in particular – rather hard again today. A look at the FTSE MIB daily chart:

The drag isn’t just being confined to Italy as other European indices are also tumbling again today. Here’s a glance of how the others are performing:

• Eurostoxx -1.4%
• Germany DAX -1.5%
• France CAC 40 -1.5%
• UK FTSE -1.3%
• Spain IBEX -2.0%

The euro is barely hanging on in there with EUR/USD down 0.2% to 1.0595 at the moment as the technicals are looking a bit shaky.

This article was written by Justin Low at www.forexlive.com.

There isn’t all too much conviction in markets for the time being but there are some decent moves in European morning trade.

The dollar is keeping more mixed with the euro and pound coming under pressure against the greenback, with the former not getting much help from the ECB yesterday. There is plenty of market chatter about fragmentation risks and it isn’t going to go away any time soon.

That has also dragged down European stocks despite US futures looking more tepid. European indices are down by over 1% across the board with Italy’s FTSE MIB leading the drop, down by over 2.7% as the BTP-Bunds spread climb.

EUR/USD is now dragged to session lows, pushing towards 1.0590 as sellers look to solidify a drop below the recent consolidation range:

The pound is also down 0.3% to 1.2450 and is testing daily support around 1.2458-71 with the week’s low at 1.2430 also a key support level to watch out for. Meanwhile, USD/JPY has recouped its drop from earlier in a push back up to 133.90 levels:

Elsewhere, the dollar is trading higher against the loonie after the jump yesterday with USD/CAD up another 0.3% to 1.2735 on the day. The greenback is trading down against the aussie and kiwi though with the former moving up to 0.7115, up 0.3% against the dollar currently.

US futures are looking more tepid and tentative, so I’m not going to read much into the aussie and kiwi moves for now. It’s all about how markets will digest the US inflation data later but I fear that yesterday’s jitters will not be easily forgotten before the weekend.

This article was written by Justin Low at www.forexlive.com.

Looks like someone isn’t concerned about the jump in the BTP-Bunds yields spread. If ECB policymakers are the slightest bit concerned, well they’re not really showing much sense of urgency for the time being. Either way, it may grow into a bigger problem in the months ahead.

This article was written by Justin Low at www.forexlive.com.

The euro is seeing a bit of a whipsaw amid the ECB policy decision but it is one that mirrors the movement in European bond yields. As the ECB lays out an expected 25 bps rate hike in July, they are leaving the option for a potential 50 bps move in September and that is getting markets riled up a fair bit.

10-year German bund yields have jumped up to 1.42%:

Money markets have now increased bets on ECB rate hikes by year-end, pricing in 140 bps worth of rate hikes as compared to 130 bps coming into the decision today. A full on 75 bps worth of rate hikes have now been priced in by September.

Despite that, the euro’s upside may well be very limited if this is about as good as it gets in terms of hawkish surprises from the ECB today. I don’t see how else Lagarde can spin things into being more hawkish especially considering the market pricing above.

And with EUR/USD unable to look towards 1.0800 or the topside of its recent consolidation range, I fear that we could run into selling pressures as long as other dollar factors stay the course on the week:

Don’t forget that the ECB also raised its inflation forecasts and lowered its growth forecasts in its latest projections today. Stagflation much?

This article was written by Justin Low at www.forexlive.com.

The strongest to weakest of the major currencies

The JPY is the strongest and the AUD is the weakest as the North American traders enter for the day. The JPY’s rise is in contrast to yesterday when it was the runaway weakest reaching the lowest level since February 2002 and getting within shouting distance of the 2002 high at 135.16. The high price yesterday reached 134.557.

The ECB kept rates unchanged as expected. The asset purchases program will end at the end of the month and that will usher into an expected rate hike of 25 basis points next month and going forward. They now see end of year inflation at 6.8% and 2023 at 3.5% well above the 2% target.  The market is continuing to price in a 135 basis points of increases by the end of the year.  Market traders will be focused on the press conference to begin at 8:30 AM ET and how Lagarde maneuvers through ultralow rates, high inflation, and economic slowdown as result of the Ukraine war (and high energy prices). Also at 8:30 AM, the weekly initial jobless claims will be released with expectations of 205K vs. 200K.

US stocks are higher in premarket trading, after yesterdays declines. The price of crude oil is trading marginally lower but near recent highs and above $120. Natural gas is in flux after a fire at a LNG export terminal in Texas which will likely take out supply for potentially months to Europe. Natural gas futures in the UK and continental Europe, a beneficiary of this plant’s supply, soared over 30% from Wednesday’s close. Meanwhile in the US, prices of natural gas move lower as the suspension in the exports will have the impact of keeping gas in the North American market. Natural gas futures in the US are trading at $8.24 after reaching a high yesterday of $9.65.

A snapshot of the markets are showing:

• Spot gold is trading down $3.84 -0.21% $1848.35
• Spot silver is trading down $0.10 or -0.43% $21.93
• WTI crude oil is trading down $0.20 and $21.90
• bitcoin is trading at $30,361 after trading at $30,248 near the 5 PM New York traders exit yesterday

In the premarket for US stocks, the futures markets are implying a higher opening

• Dow is trading up 125 points after yesterday’s -269.24 point decline
• S&P index is up 19 points after yesterday’s -44.89 point decline
• NASDAQ index is up 69 points after yesterdays -88.96 point decline

In Europe, the major indices are lower as higher energy prices way on the stock markets

• German DAX is down -85 points or -0.59% at 14361
• France’s CAC down -15.7 points or -0.24% 6432
• UK’s FTSE 100 is down -37.5 points or -0.49% up 7555.21
• Spain’s Ibex is down down 44 points or -0.50% at 8798.21
• Italy’s FTSE MIB down down 113 points or -0.46% at 24131

In the US debt market, the yields are modestly changed with the longer end a little lower ahead of the 30 year bond auction at 1 PM ET

US yields are little changed/mixed

In the European debt market, benchmark 10 year yields are mixed as traders adjust to the ECB decision.

Benchmark 10 year yields in Europe

This article was written by Greg Michalowski at www.forexlive.com.

• Prior decision

• Deposit facility rate -0.50%
• Main refinancing rate 0.00%
• Marginal lending facility 0.25%

• APP purchases to end on 1 July
• Intends to raise key interest rates by 25 bps at July meeting
• Looking further ahead, ECB expects to raise rates again in September
• Inflation pressures have broadened, intensified
• Will maintain optionality, data dependence, gradualism and flexibility
• Inflation seen at 6.8% in 2022, 3.5% in 2023, 2.1% in 2024
• GDP growth seen at 2.8% in 2022, 2.1% in 2023, 2.1% in 2024
• Full statement

The euro got a bit of a whipsaw with a push to 1.0748 before falling back down to 1.0688 and is now keeping around 1.0700 against the dollar. The key passage is that the ECB „intends“ to hike rates by 25 bps in July but they are leaving the option for a potential 50 bps rate hike in September though. On the latter, the statement reads:

„Looking further ahead, the Governing Council expects to raise the key ECB interest rates again in September. The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.“

That will come down to inflation data in the months ahead but for now, the euro is being knocked around a little as the hawkish bets (even if it were to be little to begin with) coming into the meeting are put off – for July at least.

Besides that, the ECB raises its inflation forecasts and cuts its growth forecasts – which is very much expected. Lagarde will come next at 1230 GMT.

This article was written by Justin Low at www.forexlive.com.