Fed Hikes By 75 Basis Points As Powell Gives Hawkish And Dovish Indications
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As expected by the market, the Federal Reserve has hiked its Federal Fund Rate by 75 basis points for a fourth consecutive month. However, the market is more interested in the comments made by the Chairman and general future guidance. Most analysts have advised that the press conference showed neither signs of an ultra-hawkish nor dovish Fed.
Hawkish Fed
The Chairman of the Fed, Jerome Powell, advised that the FOMC believes interest rates will increase higher than initially anticipated. Analysts have advised that the Fed’s terminal rate may even be as high as 5.5%, which would be the highest in 15 years. This was the main hawkish comment made during the press conference, which sent the price of the US Dollar flying and US stocks crashing.
Dow Jones hourly.
The US Dollar Index has increased to 112.48, which is the highest since Oct. 20. The US Dollar has specifically increased over the past 2 hours as the European and UK trading sessions were edging closer. For example, the EUR/USD has declined by 55 Pips over the past 2 hours. Furthermore, the Dow Jones Industrial Average declined by 1.65% in its most significant decline since Oct. 7.
Dovish Fed
There was a dovish comment from the Fed, too, related to the “resizing” of interest rate hikes. The market predicts this to be super close to happening, but the question remains, how close? The Chairman confirmed that the FOMC knows that interest rate hikes will need to be resized but advised it would all depend on two factors.
The press conference indicated that the FOMC would only consider lowering the pace of hikes if they see less imbalance in the employment sector and a lower inflation rate. Therefore, tomorrow’s NFP figures and the CPI figure scheduled for next week will be vital. The Fed will also consider December’s NFP and CPI figures. The market has mainly priced in a 50 basis point hike for December, but this may change based on the above data.
Economists have voiced a word of concern regarding a higher terminal rate. Chief economist Trevor Greetham advised that the higher the interest rates go, the stronger the economy will fall without seeing inflation decline. The UK economy is at the highest risk of experiencing a recession.
GBP/USD — BoE prepares the biggest hike since 1989
The GBP/USD has formed its third impulse wave and has crossed into a lower low this morning. The price is currently at its lowest since Oct. 25. From the major currency pair category, the GBP/USD is weakening at the fastest pace as the Bank of England’s decision edges closer.
Currently, the technical indicators are signaling a downward trend, but the price will strongly be influenced by this afternoon’s rate decision, votes, and the Governor’s speech.
GBP/USD price chart.
The Bank of England is expected to join the 75 basis point clan but will most likely have a dovish tone afterward. This is where the Bank of England is likely to differentiate itself from the ECB and especially the Fed.
In addition, the market will also be eager to see how many Monetary Policy Committee members will vote for 75 basis points. Overall there are nine members. If the committee partially votes for a lower hike, this can pressure the Pound higher.
UK’s Fiscal Policy
The Bank of England has been put in a difficult position by the UK government due to its decision to delay the new UK budget. If the fiscal policy was on the contractionary side, a lower hike might be necessary from the BoE, or a higher hike if it was more expansionary, such as a Truss’ policy.
Traders should note that the GBP price will depend not only on the BoE’s policy but also on the government’s fiscal policy, which is scheduled for Nov. 17. Analysts expect the policy to be somewhat restrictive, considering the previous government’s disaster policy.
In the meantime, markets will turn their attention to the BoE’s rate decision, forward guidance, and tomorrow’s US employment figures.
