Simultaneously with the expected 75 bps rate hike, hawkish comments from Fed Chair Powell dashed hopes that interest rate hikes will end soon. And then in a few hours on Thursday, Chinese Caixin Services PMI in Oct. at 48.4 added concerns, while later today, BoE also is going to increase the rates by another 75 bps. None of them are positive for Stock markets but will raise the USD demand.
Where are US dollars going to go?
On Wednesday, US Federal Reserve’s FOMC announced a 75-basis point hike in interest rates for the fourth consecutive meeting, as was widely expected. However, the beginning of the statement was the main game change in the market, and then Mr. Powell’s answers in a press conference. at the very beginning of the statement, it says:
“Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
That means that Fed remains committed to reducing inflation to its 2 percent target and that the pace of rate hikes will depend on the impacts of monetary policy decisions made so far, inflation, and economic and financial developments. Even if at the first, it sounds like a dovish stance, in fact, it is directly emphasizing that inflation is the main focus and still it is high, while as later they mentioned: “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”
Although Powell said that rate hikes will be slowed since the December meeting, it was also expected. I also should add that even with a 50 bps rate hike, it still means that a restrictive policy stance will be adopted for some time to come, the terminal rate will be higher (previously forecasted at 4.6% in September), and it is still too early to say that inflation can be controlled. After Powell’s speech, the Fed’s swap trades showed that the Fed’s interest rate peak in May 2023 will be close to 5.10%.
In response, after the news, the US dollar index reversed the intraday decline and rebounded by more than 1.5% to 111.90 on Wednesday’s close. On Thursday and after the first hour’s decline, with more than 0.7% gain, it is trying to get back the 113 area. From the technical point of view also, trading above 20-DMA, while OBV also trading higher, bulls still have more power than bears.