Fed Might Need ” Irish Luck ” as Things Will Likely Get More Challenging

But for sure, the market is happy to put the FOMC in the rear mirror, but now its likely time to start contemplating if we ” jumped the gun” on cease-fire trades after US President Biden has approved a new military aid package for Ukraine, including anti-aircraft weapons and armed drones, following Ukraine President Zelensky’s speech to Congress on Wednesday.

Then again, media reports suggest tentative signs of progress on the peace talks. So who knows.

What do we know?

We know that the Fed intends to get on top of inflation quickly, with seven successive rate hikes this year and four next. But critically, the Fed’s forecasts indicate that it only wants to pull inflation back down, not flame it out. Which might be good for gold.

Whether it can achieve its forecasts is another matter, but for now, the market will likely position for front end yields up while the long end gets contained by lingering inflation protection trade ( TIPS)

As for stocks, soft landings are extremely rare despite equities currently being in a world of their own likely content from the Fed’s non-combative start.

Still, when policy bites later down the road along with the crippling energy prices that will most certainly hurt growth, the Fed will need “Irish Luck” as things will likely get more challenging.

FOREX

GBP

GBPUSD had been trading constructively ahead of Wednesday’s FOMC decision, as perhaps some short cable risk reduction emerged. And pre-positioning into the event was a factor, combined with the takeaway that the Fed would work to rein in inflation while also supporting economic growth, leading to a rebound in risk sentiment the USD easing (JPY aside)

The FX market’s focus shifts to today’s Bank of England decision, with a 25bp hike expected later. Still, given the events in Ukraine and energy prices, market participants will likely remain focused on inflation projections and any comments on the implications of recent events for policy going forward.

AUD

Wage inflation has been relatively low in Australia relative to its G10 peers. Today’s data signalling a tightening in labour market conditions should favour a more hawkish interpretation within the RBA.

AUD has not been trading on rate differentials but terms of trade and a solid beta to China sentiment. These factors point to AUDUSD upside in the near term, especially as the market now expects China to cut the LPR rate on March 21 after China’s Financial Stability and Development Committee urged monetary policy to take the initiative to support eco growth in Q1.