Thursday, 2 February 2023
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•          The Fed unanimously decided to raise its policy rate by 25 bps to 4.5%-4.75%, in a second consecutive downshift (+75 bps in November; +50 bps in December). In its new policy statement, they still commit to future increases (multiple) in the policy rate, but a reference to pace (magnitude of hikes) is changed by one to extent (amount of hikes), indicating that the final steps before hitting the peak rate will definitely be 25 bps moves. The Fed characterizes inflation as remaining elevated, but added that it has eased somewhat. Russia’s war against Ukraine contributes to elevated uncertainty instead of putting upward pressure on inflation (December statement). In the space between the release of the statement and Fed Chair Powell’s press conference, front end yields added around 5 bps. Stocks faced moderate selling pressure while EUR/USD tried to dive back below 1.09. All from the point of view that multiple hikes from the current level imply a higher peak rate than discounted. (>5% vs <5%).
•          Enter Powell. Known for his pragmatic communication style, he actually pulled a(n early) Lagarde. He lacked his usual fire (not fully recovered from his Covid-infection?) to talk up the market to the Fed’s projected rate path and at sometimes it even felt as a capitulation trade: “Certainty is just not appropriate here. I’m not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we’ll need to keep rates higher for longer”. While we think that the Fed will deliver two more 25 bps rate hikes in March and May, Powell did seem to prepare markets for a potential change in dots going forward by making them data-dependent on fresh reports of hiring, inflation and activity before that meeting. On inflation, he mentioned for the first time that the disinflationary process has started. Finally when it comes to the unwanted easing of financial conditions since the previous meeting (weaker dollar, lower/stable rates, tighter credit spreads, stronger stock markets) he said that “the Fed’s focus is not on short-term moves”. For the record: Powell stuck for most of the press moment to his hawkish views, saying that the inflation battle isn’t won, that the labour market remains extremely tight, that the risk/consequences of underdoing it are way bigger than the ones around staying the course and that policy will remain restrictive for some time to come. We give outsized weight to these small “dovish” twists during the Q&A session because they sparked the market reaction that followed: a U-turn. US yields tanked 9 to 11 bps in the 2-10yr bucket of the curve with the very long end underperforming (-6.6 bps). YTD lows are still out of reach for now. Fed Funds future lost around 5 bps from H2 2023 onwards and around 10 bps early 2024 (Dec23 at 4.5%).US stock markets turned losses into gains, rallying by up to 2% for Nasdaq. EUR/USD took out 1.0942 (50% retracement on 2021-2022 decline) to currently trade above 1.10 for the first time since April of last year. The pair is testing the topside of the upward trend channel in place since the end of November. EUR/GBP joined the rise higher, testing the high 0.88-resistance zone. The euro/ECB is about to outhawk both USD/Fed and GBP/BoE. Both ECB and BoE will likely deliver a 50 bps rate hike today, with Lagarde hopefully succeeding where Powell failed: convincing markets of a tighter policy ahead. BoE Bailey will likely sound more cautious, helped by slightly better growth and slightly lower inflation forecasts. We expect German Bunds to sell-off, underperforming US Treasuries and UK Gilts. A tougher risk climate can amplify worries for GBP while creating some breathing space for USD.

News headlines

•          Central Bank of Brazil left its Selic interest rate unchanged at 13.75%, as expected. Still the communiqué was rather hawkish. Policy committee Copcom said that while ‘recent set of indicators continues to be in line with the scenario of deceleration,…consumer inflation as well as the various measures of underlying inflation are above the range compatible with meeting the inflation target’. Inflation in January was 5.87%. The bank targets inflation of 3.25% for this year and 3.0% from 2024/25. The Bank also refers to uncertainty on fiscal policy as a factor that requires further attention when evaluating risks. In this respect, the bank ‘remains vigilant, assessing if the strategy of maintaining the Selic rate for a longer period than in the reference scenario will be enough to ensure the convergence of inflation’.The Committee reinforces that future monetary policy steps can be adjusted and will not hesitate to resume the tightening cycle if the disinflationary process does not proceed as expected’. The Basilian real rose further against the dollar (USD/BRL 5.05) but this was mainly due to the decline of the dollar post-Fed.


The ECB flagged more 50 bps rate hikes in Q1 2023, accompanied by QT. This clear prioritization to combat inflation pushed the 10-y Bund to a new cycle top just north of 2.50% at the end of 2022. A potential depo rate peak at >=3.50% and a further reduction of excess liquidity suggests new upside after the early 2023 correction lower. A sustained break above 2.56% resistance (62% retr. on 2008/2020 decline) needs a high profile trigger.

The December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. US yields rebounded, but markets doubt this guidance as recessionary fears linger. Early January activity/labour/inflation data and the February policy meeting (+25 bps) failed to convince them and triggered a correction lower in yields. Support kicks in between 3.32% and 3.4%.

The dollar lost momentum in Q4 as US inflation started topping out. EUR/USD leaving a downtrend channel improved the technical picture with the euro receiving support from the ECB’s hawkish twist, lower energy prices and a bullish risk sentiment at the start of 2023. The pair broke above 1.0942 (50% retracement on 2021-2022 decline) after Powell failed to convince markets on a restrictive policy throughout 2023

The BoE raised its policy rate by 50 bps in December, with more to come. Recessionary fears among at least part of the MPC might cause a less aggressive approach on inflation further out. Twin deficits are a structural negative for sterling too. EUR/GBP left the 0.86 area post-ECB, the high 0.88 resistance area holds at least for now. A break opens the way to the 0.90 area.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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