The Federal Reserve has increased interest rates by 0.50%, bringing the fund rate to a 15-year high as expected by the market. Investors were specifically looking for guidance from the regulator’s Chairman, Jerome Powells, regarding future interest rates, inflation and the economic outlook. In response to the event, the US Dollar, Gold and global assets saw higher levels of volatility.
Fed Rate Hikes and Expectations
The Fund Rate is now at 4.5%, but investors positioned their trades largely on the forward guidance from Powells. Investors have been aware that the Fed’s target interest rate is between 5%-5.5%. However, most economists have advised market participants are pricing in a rate cut in 2023. In addition to this, the Fed previously advised the institution will need to halt and evaluate at some time soon. Traders have looked for clarity as to whether this is likely to happen in January considering the recent inflation slowdown.
The Chairmen did a good job in clarifying most of the market’s questions and this is likely to be priced throughout the week. Firstly, Mr. Powells confirmed the Fed is not looking to stop rate hikes in January and there is very little chance of seeing rate cuts in 2023. The Fed expects interest rates to remain above 5% in 2023, 4% in 2024 and 3% in 2025, according to the chairman. This is considerably more hawkish than expected by the market.
However, some have stuck to their opinion of rate cuts in 2023 as a recession is almost inevitable. Indeed traders should note that the chairman had confirmed economic growth has slowed and consumer spending has also declined. This is one of the reasons that the stock market saw some panic selling. Though the Fed had advised they are comfortable with a slowdown and an unemployment rate as high as 4.6%. Therefore, the Fed may keep rates high to bring down inflation, even if we experience a recession.
Gold
The price of the US Dollar and yesterday’s rate decision largely influenced the price of Gold. The price on high timeframes seems to continue within the bullish trend and within the trend’s regression channel. However, the price is experiencing a significant decline this morning of over 1%. Investors will be monitoring if the price breaks through support levels and if the Dollar continues to increase in value.
According to the US Commodity Futures Trading Commission, the overall speculated position this week significantly increased amid the rate decisions from more than 10 worldwide central banks. The report also confirmed that positions in favor of the price decline have indeed increased. In addition to this, investors are evaluating whether we will now see a stronger Dollar throughout December and January.
GBP/USD
The GBP/USD has formed 6 consecutive days of price increases but potentially will end today after the Dollar increase. The price of the US Dollar has increased by 0.50% against the Pound and also attempted a decline down to 1.23430 after last night’s press conference.
This level has formed a strong support level and breakout point. Traders looking to further short the Pound will potentially aim for this level and may obtain further signals if a breakout is formed. Currently, indications on the 1-Hour chart are pointing toward a further decline.
Traders will also turn their attention to the Bank of England, but the asset will continue to be influenced by yesterday’s event. This week the Pound received some positive figures from the latest GDP reading and inflation rate. However, today the market will be fixed on the Central Bank’s Rate decision and guidance given for the UK’s future monetary policy. The Central Bank is expected to increase the Official Bank Rate by 0.50% to 3.50%.
The price of the exchange rate is also expected to be influenced by the US Retail Sales announcement this afternoon and tomorrow’s Flash Purchasing Managers Index. Economists deemed all the mentioned releases to be of high importance. However, it is also important that traders perform technical analysis to ensure they are not caught in the wrong direction.
Summary:
- The Federal Reserve increased interest rates by 0.50% but remained hawkish for 2023.
- Stocks example some panic selling after comments from Jerome Powells and a stronger US Dollar.
- Gold declines and obtains indications of a further price decline.
- UK investors turn their attention to the Bank of England while the Pound declines against the US Dollar.