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FOMC raises federal funds rate target by 75 bps to 2.25-2.50% as widely expected. The decision was by unanimous vote.

In the accompanying statement, Fed said that recent indicators of spending and production have "softened". But job gains have been "robust". Inflation remains "elevated". Russia's war against Ukraine are "creating additional upward pressure on inflation" and are "weighing on global economic activity".

Fed pledged to "continue to monitor the implications of incoming information for the economic outlook" and be "be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals".

Full statement here.

Recent indicators of spending and production have softened. Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.

Russia's war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2-1/2 percent and anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve's Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lael Brainard; James Bullard; Susan M. Collins; Lisa D. Cook; Esther L. George; Philip N. Jefferson; Loretta J. Mester; and Christopher J. Waller.

Markets

The (mostly) European inspired recession trade that dominated trading since end last week finally took a breather as the market focus is turning to this evening’s Fed decision. European data at least didn’t provide much comfort. German GFK August consumer sentiment dropped further to a record low (-30.6 from 27.7) as consumers pondered whether there will enough gas this winter. Sentiment indicators in Italy and France also show growing pessimism among businesses and consumers. For now, there are few indications that uncertainty on Russian gas supplies will be resolved any time soon. The reference Dutch gas contract again touched a new peak since March (€ 222.5 MWH) before easing modestly. Despite lingering fears on a sharp deterioration in EMU economic activity, German yields bottomed, at least temporarily, after recent sharp decline. German yields ‘regain’ between 1-2 bps. On intra-EMU bond markets, Italian bonds again underperform (10-y spread vs Germany +6 bps) after S&P yesterday evening changed the outlook on the Italian BBB rating from positive to stable (cf. infra). US data mostly were stronger than expected. The US June trade deficit narrowed to $98.2 bln from $104 bln. US durable goods orders unexpectedly jumped 1.8% M/M. Even as the rise was supported by defense aircraft orders, core capital goods shipments (used to calculate investments in the GDP report) also rose a solid 0.7%. The data are supportive for tomorrow’s Q2 GDP release. Still it had little lasting impact on (bond) markets. US yields even decline up to 5 bps (5-y). Equity markets are in better shape today, supported by solid earnings from US bellwethers. European equities again up to 0.75/1.0%. US indices open with gains of up to 2.0% (Nasdaq). Moves in most major USD cross rates remain very limited. The DXY USD index declines marginally (107.5). EUR/USD hovers in the 1.0150 area. EUR/GBP tested the 0.84 area, but no break occurred (currently 0.8425).

The most important topic for global trading today evidently is this evening’s Fed decision. Anything different from a 75 bps trade hike to 2.25%/2.50% would be a huge surprise. Investors will be keen to get insights on the pace of the hiking cycle in September and beyond. Fears for a slowdown recently lowered expectations for Fed hiking to come to an end around the turn of the year near 3.25%/3.5%. We’re not convinced that Powell will already signal the Fed to sharply slow its anti-inflation campaign in the near future as inflation remains elevated and the labour market stays hot. As recent repositioning was mainly driven by risks to growth rather risks to persistent high inflation, a balanced Fed message might slow the setback in yields. Such a scenario would also help to put a floor for the USD.

News Headlines

The leaders of Italy’s right-wing bloc are meeting this afternoon to agree on how to pick the country’s new prime minister should they win the elections on September 25 as polls currently predict. The gathering takes place against the backdrop of S&P having lowered Italy’s outlook from positive to stable. The rating agency said Draghi’s resignation and the prospect of early elections risk shifting the “focus away from key reforms and further weigh on confidence and growth at a time of high uncertainty and rising inflation.” Under an informal rule, the party that gets the most votes picks a new PM. According to a most recent poll, this would be Meloni of the Brothers of Italy party (23.4%). But the League and Forza Italia are resisting this. Italian bond underperform today following the S&P downgrade. The spread vs. Germany’s 10y yield is at 236 bps, the highest since mid-June.

Sunak, one of the two remaining candidates to become the UK’s next PM, dramatically changed his view on tax cuts. In a surprise announcement today, Sunak said he would scrap the VAT on domestic energy bills if he wins. Going into the leadership contest, he defended his fiscally conservative approach as being essential to fix public finances and not to stoke inflation even further. His opponent, Truss, on the other hand hinted at a raft of immediate tax cuts should she become PM. The Secretary of State is leading by a big margin in polls of party members.

The euro has edged higher on Wednesday, after sliding over 1% yesterday. In the North American session, EUR/USD is trading at 1.0147, up 0.29% on the day.

All eyes on Federal Reserve

The markets are eagerly awaiting the FOMC decision later today. The meeting is live, with the Fed expected to raise rates by 75bp for a second straight month, which will bring the benchmark rate to 2.50%. There is an outside chance that the Fed will opt for a massive 100bp move, as inflation shows no sign of peaking and hit 9.1% in June, up from 8.6% in May.

Even if the Fed delivers the expected 75bp increase, the move could shake up the currency markets. Investors will be paying close attention to the Fed’s guidance over the coming months and the tone of Powell’s rate statement and follow-up press conference. If Powell hints that a 75bp increase is coming in September, that would indicate a hawkish stance and the US dollar could gain ground.

The Fed decision comes just ahead of US GDP for the second quarter. After a soft reading of -1.6% in Q1, a modest gain of 0.5% is expected in Q2. The White House, fearing a second straight negative reading which technically defines a recession, is already in pre-damage control mode in case of a GDP decline in Q2, claiming that there are other ways to define a recession besides two consecutive declines.

The euro again finds itself uncomfortably close to the parity line, after a nasty slide on Tuesday. Investors reacted negatively to reports that Russia was slashing in half the gas flow in Nord Stream 1 to 20% of capacity. This has raised fears of an energy shortage in Europe this winter. The EU is scrambling to reduce its energy dependence on Moscow and announced on Tuesday that member states had agreed on a voluntary reduction of 15% in natural gas imports. Still, the agreement has wide holes, with exemptions for members that are not directly linked to EU gas pipelines and are completely dependent on Russia. EU members have to worry about their own citizens, which could make it difficult to have a united front against Russia.

German confidence indicators are pointing downwards, which isn’t surprising given the war in Ukraine and a potential energy crisis. Earlier in the day, GfK Consumer Climate fell 2.9 points to -30.6, below the estimate of -28.9. German consumers have been in a surly mood for months, as the index has been in negative territory since October 2021. The weak release follows Tuesday’s Ifo Business Sentiment, which dropped by 5.6 points to 88.6, shy of the forecast of 90.2.

EUR/USD Technical

• EUR/USD has support at 1.0105 and 0.9992
• 1.0191 has switched to resistance. Above, there is resistance at 1.0304

Daily Pivots: (S1) 136.48; (P) 136.73; (R1) 137.17; More...

Intraday bias in USD/JPY remains neutral as range trading is still extending. On the downside, firm break of 134.73 will confirm short term topping, on bearish divergence condition in 4 hour and daily MACD. Deeper fall would be seen through 55 day EMA to 126.35/131.34 support zone. On the upside, break of 139.37 will resume larger up trend.

In the bigger picture, current rally is seen as part of the long term up trend from 75.56 (2011 low). Next target is 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, which is close to 147.68 (1998 high). This will remain the favored case as long as 126.35 support holds.

Daily Pivots: (S1) 0.9609; (P) 0.9638; (R1) 0.9661; More...

Despite some loss of downside momentum, further decline is in favor in USD/CHF with 0.9738 resistance intact. Fall from 0.9884 is seen as a falling leg of the consolidation from 1.0063. Deeper decline would be seen to 0.9493 support. On the upside, though, above 0.9738 minor resistance will turn bias back to the upside for 0.9884 resistance.

In the bigger picture, medium term up trend from 0.8756 (2021 low) is still in progress. On resumption, next target is 1.0342 (2016 high). Sustained break there will resume long term up trend from 0.7065 (2011 low). This will remain the favored case as long as 0.9471 resistance turned support holds.

Daily Pivots: (S1) 1.0067; (P) 1.0159; (R1) 1.0209; More...

Intraday bias in EUR/USD remains neutral for the moment. On the downside, firm break of 1.0118 will suggest that rebound from 0.9951 has completed. Bias will be back on the downside for retesting 0.9951 low. On the upside, above 1.0277 will resume the rebound to 1.0348 support turned resistance.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0773 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 1.1965; (P) 1.2027; (R1) 1.2091; More...

Intraday bias in GBP/USD remains neutral at this point. With 1.1888 minor support intact, further rise is mildly in favor. Above 1.2089 will target 55 day EMA (now at 1.2236). Sustained trading above there will pave the way to 1.2405 resistance and above. On the downside, below 1.1888 minor support will bring retest of 1.1759 low instead.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.2986).

The currency markets continue to be relatively steady today, as traders are holding their bets ahead of Fed's expected 75bps rate hike. Euro is recovering slightly but remains the worst performer for the week, followed by Yen. On the other hand, Canadian Dollar is leading Australian and Sterling higher. Dollar is mixed for now. The interplay between US stocks, benchmark yields, and Dollar will be the major focus for the retest of the session.

Technically, some attention will also be on Gold's reaction to Fed hike. Recovery from 1680.83 is so far disappoinintg. But another rally is still envisaged. Firm break of 1745.21 minor resitasnce swhould confirm short term bottoming at 1680.83, on bullish convergence condition in 4 hour MACD. That would also be the first signal of near term bullish reversal , and turn focus to channel resitsance at around 1780.

In Europe, at the time of writing, FTSE is up 0.69%. DAX is up 0.64%. CAC is up 0.58%. Germany 10-year yield is up 0.014 at 0.942, staying below 1%. Earlier in Asia, Nikkei rose 0.22%. Hong Kong HSI dropped -1.13%. China Shanghai SSE dropped -0.05%. Singapore Strait Times rose 0.41%. Japan 10-year JGB yield dropped -0.0142 to 0.195, back below 0.2%.

Here are some previews for FOMC:

• What to Expect from FOMC Meeting on July 27th
• Trader Thoughts – Make or Break Time for US Equity Markets
• FOMC Preview – Assessing the Balance of Risk for Traders
• Fed to Likely Hike by 75 bps But May Still Weigh 100-bps Option
• FOMC Meeting Preview: Traders Looking for 75bps, Powell's Presser Key
• All Eyes on Bond Yields ahead of FOMC

US durable goods orders rose 1.9% mom, ex-transport orders up 0.3% mom

US durable goods orders rose 1.9% mom to USD 272.6B in June, much better than expectation of -0.5% mom decline. Ex-transport orders rose 0.3% mom, below expectation of 0.4% mom. Ex-defense orders rose 0.4% mom. Transportation equipment rose 5.4% mom to USD 92.7B.

US goods exports rose 2.5% mom, imports dropped -0.5% mom

US exports of goods rose 2.5% mom or USD 4.4B to USD 181.5B in June. Imports of goods dropped -0.5% mom or USD -1.5B to to USD 279.7B. Good trade deficit came in at USD -98.2B, smaller than expectation of USD -103.2B.

Wholesale inventories rose 1.9% mom, 25.6% yoy to USD 896.0B. Retail inventories rose 2.0% mom, 19.9% yoy to USD 723.0B.

Germany Gfk consumer sentiment hit another rock bottom at -30.6

Germany Gfk consumer sentiment for August dropped from -27.7 to -30.6, below expectation of -28.2. That's another record low since the start of the series in 1991. In July, economic expectations dropped from -11.7 to -18.2. Income expectations dropped from -33.5 to -45.7. Propensity to buy dropped from -13.7 to -14.5.

"In addition to concerns about disrupted supply chains, the war in Ukraine and soaring energy and food prices, there are now worries about sufficient gas supplies for businesses and households next winter. This is currently causing consumer sentiment to hit rock bottom," explains Rolf Bürkl, GfK consumer expert. "Especially as a tight supply of natural gas is likely to add to the pressure on energy prices and thus inflation."

Australia CPI surged to record 6.1% yoy, but below expectations

Australia CPI rose 1.8% qoq in Q2, blow expectation of 1.9% qoq. For the 12-month period, CPI accelerated from 5.1% yoy to 6.1% yoy, below expectation of 6.3% yoy. RBA trimmed mean CPI came in at 1.5% qoq, 4.9% yoy, versus expectation of 1.5% qoq, 4.7% yoy.

The quarterly increase was the second highest since the introduction of the Goods and Services Tax (GST), following on from a 2.1% increase in Q1. The annual rise was the highest since the introduction of GST.

"Annual trimmed mean inflation was the highest since the series commenced in 2003 and annual goods inflation was the highest since 1987, as the impacts of supply disruptions, rising shipping costs and other global and domestic inflationary factors flowed through the economy," said Head of Prices Statistics at the ABS, Michelle Marquardt.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1965; (P) 1.2027; (R1) 1.2091; More...

Intraday bias in GBP/USD remains neutral at this point. With 1.1888 minor support intact, further rise is mildly in favor. Above 1.2089 will target 55 day EMA (now at 1.2236). Sustained trading above there will pave the way to 1.2405 resistance and above. On the downside, below 1.1888 minor support will bring retest of 1.1759 low instead.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2666 resistance holds. Next target is 1.1409 low. However, firm break of 1.2666 will bring stronger rise back to 55 week EMA (now at 1.2986).

Economic Indicators Update

US exports of goods rose 2.5% mom or USD 4.4B to USD 181.5B in June. Imports of goods dropped -0.5% mom or USD -1.5B to to USD 279.7B. Good trade deficit came in at USD -98.2B, smaller than expectation of USD -103.2B.

Wholesale inventories rose 1.9% mom, 25.6% yoy to USD 896.0B. Retail inventories rose 2.0% mom, 19.9% yoy to USD 723.0B.

Full release here.