The Fed is widely expected to raise its benchmark interest rates by another 75 basis points.
Here are the key points to look out for:
Anything else would be a surprise.
A 75-basis point hike is 3 times larger than the customary 25-basis point adjustments that central bankers traditional deploy per meeting.
Given the roaring inflation figures around the world, central bankers have been deploying such larger-than-usual hikes in a bid to stop consumer prices from rising uncontrollably.
Note: Interest rate hikes are a central bank’s main weapon in trying to subdue runaway inflation.
The Fed has already hiked its rates by a total of 150 basis points since March (excluding today’s forecasted 75bps hike):
Hence, faced with multi-decade high inflation, the Fed is roundly expected to fire yet another 3-in-1 shot today. Back-to-back hikes of 75bps at a time are the most aggressive seen out of the US central bank since the 1980s.
That figures, given that US inflation is also at its highest since the early 1980s.
Recall that, back on July 13th, we learned that the US consumer price index a.k.a. CPI (which is used to measure how much consumer prices have changed) rose by 9.1%. Not only did it beat market forecasts, but that was also the fastest CPI year-on-year growth since November 1981.
Given the forward-looking nature of the markets, investors and traders are already trying to anticipate how high US interest rates will go before the curtains come down on 2022.
Adding today’s 75bps hike with the additional incoming 100bps by year-end, that would raise the upper bound of Fed Funds target rate up to around 3.5%.
If today’s policy decision and press conference play out exactly as per the above-listed scenarios, then it could be a ho-hum session for FX markets.
However, if there’s any clue that forces markets to significantly alter those above-listed expectations, then we could see heightened volatility across FX markets (and also stocks, commodities, and even crypto; across asset classes).
Expect a combination of the above-listed scenarios.
Generally, the more aggressive a central bank is about raising its own rate, the stronger its currency, relative to the other currency whose central bank is deemed to be lagging behind.
For example:
If so, that would bring 2022’s total of Fed rate hikes to 325 basis points.
That would bring 2022’s total of ECB rate hikes to 160 basis points.
With the Fed clearly being more aggressive with its rates hikes compared to the ECB (325bps vs. 160bps in total hikes expected for 2022) this has resulted in declines EURUSD.
No surprise that the world’s most popularly-traded currency pair has remained around 20-year lows close to parity in recent weeks.
In order to assess how the US dollar might react overall in relation to its G10 peers, one could just look at the equally-weighted USD index (as opposed to the benchmark dollar index – DXY), which measures the buck’s performance against six other major currencies all in equal proportions:
Generally, as long as the Fed can persist with its pedal-to-the-metal approach in raising US interest rates, assuming the US economy can withstand such elevated rates, that should ensure that the US dollar remains well supported.
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A highly experienced financial journalist and producer with more than seven years of experience gained across some of Southeast Asia’s (SEA) most prominent business broadcasters.