Inflation and Recession

Key insights from the week that was.

The Federal Reserve’s next move after an anticipated pause is more likely to be a cut than a hike due to already restrictive rates, falling inflation and a recessionary economy.Pause talk is in the air – with the market pricing in only a ~30% chance of a rate rise at next week’s Fed meeting – before further hikes. But the world, and the Fed, could look sufficiently different even by late summer that the risk calculus starts to favor looser monetary policy.

The back-to-back surprise rate hikes by the Australia and Canada spurred speculation that the Fed could hike next week, and this lifted US rates and helped the dollar recover. The odds of a hike increased, according to the indicative pricing in the Fed funds futures market from about a 20% chance to a little above 35%. now. At yesterday's high, the two-year yield was up a little more than 25 bp since the low before the US employment data last Friday. It is little changed today near 4.55%. Still, the greenback is softer against all the G10 currencies, but is mostly consolidating in narrow ranges. Emerging market currencies are more mixed. Of note the Chinese yuan is snapping a four-day fall, and after plummeting 7% yesterday, the Turkish lira steadied, but is off about 0.6%.

USDJPY edged lower on Thursday, keeping negative momentum below the psychological mark of 140.00 after failing to break the 141.00 level several times over the past week. The overall outlook remains bullish but is weakening as the Relative Strength Index (RSI) momentum is approaching the border of negative territory and the stochastic oscillator is moving down.

The Bank of Canada unexpectedly raised the overnight rate by 25 basis points to 4.75% and indicated its commitment to continue implementing quantitative tightening (QT) to support the Canadian dollar.

Malaysia's inflation currently isn't misbehaving, giving the central bank room to keep up its "conditional pause", according to a senior official.

The Bank of Canada has resumed interest rate increases after a five-month hiatus. Demand is proving to be more resilient and inflation could be more persistent. Another hike looks likely in July, but we are wary about pushing for more aggressive action. The attractive risk-adjusted carry can keep CAD in investors' favour for longer .

Data released last week showed that the core inflation rate in the UK unexpectedly accelerated to 6.8% in April, prompting the market to raise expectations for the Bank of England to raise interest rates.

The AUDUSD rose to a three-week high on Wednesday. Earlier, the Reserve Bank of Australia unexpectedly raised interest rates by 25 basis points to 4.1%, the highest level in 11 years, and said that further interest rate hikes may be needed to push inflation to the target.

The Bank of England is trying to curb an inflation rate that is running higher in Britain than in the United States and the euro zone, without pushing the economy into a recession after having already increased borrowing costs 12 times since late 2021.