• Fed raises rates but overall message not as hawkish as markets expected
• Dollar takes a step back, stock markets and gold come back swinging
• Bank of England meeting today might play out in a similar manner

Don’t fear the Fed

As widely expected, the Federal Reserve raised interest rates by half a percentage point and announced that the balance sheet reduction process will commence in June. There was a lot of speculation ahead of the event that the Fed would consider even larger rate increases of 75 basis points, but Chairman Powell shut that down.

The Fed chief stressed the Committee is not “actively considering'' 75 bps hikes and said that rates will likely be raised by 50 bps at the next “couple” of meetings. Markets were pricing in 50bps moves at each of the next three meetings, so this was a much softer message than feared.

Overall, this was a classic case of the market overpricing the Fed’s trajectory. With Powell essentially saying that shock-and-awe rate hikes are off the table and opening the door for a slowdown in the pace of tightening after the summer, he made it clear that his Fed will prioritize avoiding a recession over vanquishing inflation.

That gave investors the green light to load up on riskier assets, propelling the S&P 500 higher by 3% with tech shares leading the charge. Beyond the cautious rate signals, equity markets took some solace in the pace of the balance sheet reduction process, which will operate at only half speed for the first three months instead of running at full force right off the bat.

Dollar rally cools, gold snaps back

The mighty US dollar finally took a step back as traders realized the Fed won’t go into overdrive. Euro/dollar rose by one big figure, most likely on profit-taking and short-covering rather than any profound changes in the fundamental outlook.
The standout performer was the Australian dollar, which gained an astonishing 2.3% in a single session, supercharged by the rally in equity markets.

There is clearly some relief across the FX complex that the Fed won’t throw caution into the wind when raising interest rates. And with the ISM surveys pointing to a disappointment in tomorrow’s US employment report, the dollar could remain on the back foot. However, an outright trend reversal seems highly unlikely while every other major economic region is flirting with recession, much more so than America.

With the Fed’s not-so-hawkish stance knocking the wind out of real yields and the US dollar, gold prices finally breathed a sigh of relief. The precious metal clawed its way back above the $1890 territory to virtually erase all its losses for the week. For now, bullion will likely remain hostage to any shifts in Fed pricing and might even enjoy more gains if the dollar continues to surrender ground.

In the bigger picture, it increasingly seems like gold’s best days are behind it. If the yellow metal couldn’t reach new record highs with a war raging in Europe, negative real yields, and inflation running at the fastest clip in four decades, it’s difficult to see when it will.

BoE and OPEC in focus

The spotlight today will fall on the Bank of England decision, where a quarter-point rate increase is already fully priced in. Money markets also assign a small chance for a bigger half-point hike, although with risks around the growth outlook intensifying, that seems very unlikely.

Governor Bailey has been quite vocal lately about the shock to real incomes, foreshadowing a potential pause in the tightening cycle over the summer. If this cautious stance is echoed today, the pound could meet a fate similar to the dollar’s after the Fed meeting, as markets are still pricing in 150bps of BoE hikes this year.

Finally, OPEC will also meet today but reportedly, there’s little appetite for any policy shifts.