ECB's Christine Lagarde not to announce the end of rate hikes?

As expected, the Federal Reserve (Fed) raised the interest rates by another 25bp yesterday, and hinted at an eventual pause 'to wait and see' what happens from now.  

Fed Chair Powell said that the Fed is 'prepared to do more', and that a decision on a pause 'was not made' this week, and that the future of the US rate policy would depend on the economic data.  

And he said that 'conditions in the banking sector improved since early March'.  

BUT PacWest, another US regional bank, saw its share price slump by more than 50% in the afterhours trading, after the bank announced that it considers strategic options like a breakup, capital raising or a sale. It looks like more trouble is brewing for the US banking sector, on the contrary of what Powell said yesterday.  

Anyway, the idea of a pause may have pleased investors - because the bank failures help tightening the lending conditions and throw a solid ground for a pause in rate hikes. But what pleased investors less is Powell pushing back on a potential rate cut later this year. It's normal. For him, there is no problem with the US regional banks, and all is fine.  

The problem is, yes, the equity markets sold off on the very-predictable announcement that there would be no rate cuts, and yes, the S&P500 slid 0.70%, and Nasdaq 100 gave back 0.64% yesterday, but there are two markets that don't believe Powell.  

One is the US sovereign bond market, where the US 2-year yield plunged to 3.80% yesterday, as traders priced in at least three rate cuts in the second half of this year.  

And two: oil markets, that fully take into account the banking crisis and that refuse to buy the idea of a possible 'soft landing' in the US economy.  

The barrel of US crude slumped to $63pb yesterday; even the EIA revealing a 1.3-mio-barrel fall in US inventories, or the blowout ADP report showing that the US economy added almost 300'000 new private jobs in April, almost double the 150'000 penciled in by analysts didn't help.  

ECB to hike, but not hint at a pause. 

In Europe, the European Central Bank (ECb) is also expected to announce a 25bp hike when it meets today. The strong decline in bank lending – as a result of bank stress, and signs of slowing inflation – despite last month's rally in energy prices, hint that a 25bp hike could be more appropriate in Eurozone this week than a 50bp hike.  

This being said, ECB Chief Christine Lagarde will certainly not announce the end of the rate hikes in the Eurozone. She will likely stay firm on the ECB's determination to fight inflation, and insist that the economic data will determine the size of the upcoming ECB actions.  

Read next: Expect the ECB to keep increasing rates at the short-term, at least until the summer| FXMAG.COM

The EURUSD rallied to 1.1090 after the Fed decision, as the US dollar sold off on the idea that the Fed will now take a breather and pause the rate hikes, and perhaps on the idea that the ongoing bank stress will likely make the Fed change its mind regarding a rate cut later this year.  

While I still don't believe that a Fed rate cut will be on the menu for this year, the back-to-back US regional bank failures make me wonder if I am not too stubborn.  

Anyway, the divergence between a softer Fed, and a fairly decided ECB to fight inflation, should continue pushing the EURUSD higher. The next target for the euro bulls stands at 1.1254, the major 61.8% retracement on 2021-2022 selloff. 

Across the Channel, Cable rallied past 1.2590 as Credit Suisse increased its estimate for the peak Bank of England interest rate from 4.50% to 4.75% saying that recent positive surprises to growth, high inflation and labour market do back a higher end rate. The BoE will announce its own decision next Thursday.  

In precious metals, gold spiked to $2080 on the back of a slide in US yields, the softer dollar after the Fed announcement and further bank stress. At the current levels, the upside potential depends mostly on what will happen on the US yields front. There is a strong negative correlation between the US yields and gold's valuation. It's normal. Lower yields decrease the opportunity cost of holding the non-interest-bearing gold and increases appetite for gold investors. And we see that this correlation is even stronger at the time of rising bank stress. Therefore, a potential escalation in bank stress could support gold, but gold needs persistent downside pressure in the US yields to reach and to breach the $2100 resistance.