Risk assets rebound. S&P500 propelled higher from 200-day moving average. Bank of England hikes by 25bps, as expected. NZDGBP bounces off 5mth lows

By Stuart Talman, XE currency strategist

In the wake of yesterday’s policy update from the Fed and US Treasury Secretary Yellen’s admission that a blanket guarantee of bank deposits would not be forthcoming, the market’s mood has improved amidst 48 hours of heightened volatility.

Both the FOMC statement and Powell’s comments were viewed through a dovish lens, the Fed signalling that the tightening cycle is nearing its peak, the latest set of dot-plots maintaining the projected peak Fed funds rate at 5.10%, implying one more hike…..maybe.

Fed Fund futures currently assign a ~40% probability of another 25bps hike in just over 40 days when FOMC officials next meet.

Despite Fed dovishness, there was a hawkish element to Powell’s presser, the Fed Chair dismissing the likelihood that rate cuts would commence through 2023. This is at odds with the market, currently pricing in circa 75bps of cuts through the second half of the year.

It’s now clear that the Fed’s laser-like focus on inflation and jobs numbers has broadened to include the embattled regional US banking sector – credit and deposit flow data also monitored to ensure that a systemic banking failure does not occur.

Yellen stole Powell’s thunder, her mid-FOMC presser comments derailing the risk rally that was gaining momentum during the early stages of Powell’s Q&A session. At Wednesday’s session peak, the S&P500 was up close to 1%.....an hour later, the index had closed down over 1.50%.

Retreating from a key resistance zone located between 0.6270/90, the New Zealand dollar recovered throughout Thursday’s local session and into the London morning, logging the day’s high a few pips above 0.6290. The Kiwi has consolidated its rebound through US trade, ranging between 0.6260 and 0.6290.

Should the Kiwi break through the resistance zone with conviction and extend higher through 0.6311, the 50% Fibonacci retracement of the February to March sell-off, the downside bias of the past month shifts to neutral.

Importantly, NZDUSD has been consolidating above the 200-day moving average as the past fortnight has delivered range bound trade between 0.6140 and 0.6290.

The S&P500 has also staged an important technically important bounce off its 200-day moving average, the widely monitored trend following indicator providing support at yesterday’s session lows. Trading in the high 3900’s, the next big upside test for the boarder index is located at 4100.

Should price action ascend through this level with conviction, US stocks could surge higher, in turn pulling the Kiwi higher.

A risk rally of this nature would require some positive banking sector news flow.

The headline event for Thursday was the Bank of England’s monetary policy decision. Following Wednesday’s hot CPI report, the BoE was widely tipped to hike by 25bps. The key takeaways from the decision:

• BoE hikes by 25bps to 4.25%
• Vote was split 7 to 2 (on-hold)
• BoE more upbeat, sees inflation falling rapidly through 2023

It was the 11th consecutive hike from the BoE, and the smallest since June of last year.

The UK central bank forecasts a rapid decline in inflation through the Northern Hemisphere summer, implying that like the Fed and other major central bank’s they are nearing the end of the tightening cycle.

The market currently assigns a 50/50 split of a 25bps hike at the next BoE meeting, held on 11 May.

The Kiwi continues to rebound from 5-month lows against the pound, logging a second day of gains having bottomed a pip or so south of 0.5050 on Tuesday. Thursday’s ascent has taken the pair back through 0.51. We’d need to see old support at 0.5085 prop up price action in the days ahead to gain confidence that a key swing low has formed.

Looking ahead to the final day of the week its PMI day, S&P Global flash readings of manufacturing and services activity for the US, UK and eurozone economies the potential market movers as we conclude an eventful week.

January’s PMIs were broadly stronger than expected….should this trend continue, expect Thursday’s risk rally to extend into the weekend.

The Kiwi may well close above 63 US cents for the first time in 6 weeks.

Stuart Talman is Director of Sales at XE. You can contact him here.