All eyes will be on the Federal Reserve this week as Chairman Jerome Powell is expected to announce a 50-basis point rate hike and additional guidance on how it will unwind its9 trillion balance sheet. Amid an unprecedented credit crunch during the global outbreak of Covid in 2020, monetary authorities took drastic measures to cool concerns of illiquidity and to fortify the functional integrity of the financial system.
However, with inflation clearly not being “transitory”, officials have buckled down and are pushing for aggressive tightening. Economists are expecting for the Fed to set another half-point hike again in June, and then smaller rises thereafter. However, if prices continue to surge - as Core PCE showed last week with a 5.2% increase from the prior year - it could spell trouble.
Higher rates in an environment that has become addicted to an ultra-easy credit regime means sharp adjustments are likely to cause significant volatility. Furthermore, it could also increase the Dollar’s yield appeal, further stoking demand for the Greenback. For countries who issued debt denominated in USD, servicing their sovereign bonds may become a daunting prospect.
The result could be pressure on the local currency, particularly if their respective country’s central bank is not raising rates at a commensurate speed and magnitude. Furthermore, with weaker economic activity, developing economies may see their currencies then take a double hit as demand for risk-oriented assets wilts.A slew of key US economic data will be published this week, potentially adding to what may already be a volatile couple of days.
Economists are expecting about 390k jobs to have been added for April, down from gaining 431k in March. The unemployment rate is anticipated to fall to 3.5%, down from 3.6% from the prior month. On the same day, three Fed officials will be giving speeches following the central bank rate decision. Additional remarks from monetary authorities may amplify volatility.
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