Fed say more to come

Market reports
Thanim Islam
  • Fed Powell suggests rate cuts ‘years away’
  • More rate hikes expected by RBA
  • ECB to follow suit?


Markets were looking for a clear message from the Fed and they didn’t disappoint. As expected the Fed held rates at 5.25% this month, but the message from the Fed was more hawkish than expected with the revised dot plot now suggesting two more rate hikes in 2023, before we see 1% of rate cuts in 2024. The March dot plot suggested that rates would get to 5.25% and then would be held until year-end. Based on current projections the Fed now forecast rates to be at 5.65% by year-end, and then by the end of the 2024 to be down to 4.65%. Interestingly Fed Powell played down the dot plot forecasts by stating that inflation risks remain on the upside, and any rate cuts are “a couple of years out”. He clearly seems to be more hawkish than his colleagues. Yields on US treasuries continued to rise as a result, and we saw USD gain. GBPUSD came off the May 2022 and May 2023 technical resistance levels and is now trading lower.

In contrast to other central banks, The Peoples Bank of China cut key loan rates by 0.1% on the basis that data is pointing to a weaker economy.

Over in Australia, data showed that the job market continues to tighten with the unemployment rate dropping to 3.6%, and the employment change report showed a 75,900 increase in labour force participation. It seems that the RBA were right to resume their rate hikes last week, with pricing for this year's interest rate expectations now showing two more 0.25% hikes this year. GBPAUD continues to show signs that further declines on the pair could be on the card.


Market rates

* Daily move - against G10 rates at 5:00pm, 14.06.23

** Indicative rates - interbank rates at 5:00pm, 14.06.23

Data points


  • EUR – ECB Lagarde, Nagel, Villeroy
  • GBP – BoE Cunliffe

Our thoughts

All eyes on the ECB this afternoon with a 0.25% rate hike largely priced in by the markets, and we expect the ECB to continue their hawkish tone and suggest more hikes to come this year. Another 0.25% hike is fully priced in for July so the bar already seems very high for the ECB match. Thus a more hawkish tone and a clear message of what additional hikes will look like will be needed for the EUR to gain.

US data points in focus today will be retails sales in March as well as the weekly initial jobless claims.

Chart of the day

The new dot plot suggests more hikes to come this year, with cuts forecasted in 2024. Fed Powell however is clearly more hawkish than fellow FOMC members by suggesting rate cuts are years away. Either way the markets' expectations for interest rates (OIS-Latest Value) are clearly lower than what the Fed are communicating. Should we see a convergence between OIS pricing and the Fed’s forecasts then we could well a resumption of USD strength.

Source: Bloomberg Finance L.P.

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