16.09.202612:03 Forex Analysis & Reviews: How Could Markets React to a Fed Rate Change? (AUD/USD and GBP/USD May Resume Their Declines)

Today, Wednesday, global markets are eagerly awaiting the outcome of the US regulator's two-day monetary policy meeting. Market participants are focused primarily on this event because an interest rate hike is expected.

There is currently debate in the market about how much the Federal Reserve could raise interest rates. The consensus forecast, reflecting the general market view, points to a 0.25% increase, to 3.75%. However, there is also a view that rates could be raised by 0.50% at once. Despite some divergence in expectations, the overall consensus is that the Federal Reserve will raise rates.

Ahead of this event, all markets are essentially consolidating within ranges. Even Treasury yields have corrected slightly and stabilized. In the Forex market, the US dollar is consolidating against major currencies as traders await the Federal Reserve's monetary policy decision. Federal funds rate futures indicate a 92.5% probability of a 0.25% rate hike, which represents an extremely high level of expectations.

If the consensus view is that rates will be raised, what should markets expect from this event?

The Fed is highly likely to raise interest rates by a quarter of a percentage point. However, if it unexpectedly does not do so because political considerations prevent it from raising rates in the current situation, the reaction would be the opposite, with the dollar once again coming under strong pressure. We will find out this evening whether this will happen.

On the other hand, the rate hike has likely already been priced in to a significant extent, as reflected in the dollar's movements. Another factor that could limit further dollar appreciation will be additional rate hikes by other major central banks, such as the Bank of England, the ECB, or the Bank of Japan, which will be forced to raise borrowing costs amid rising inflation and high oil prices. Of course, against this backdrop, a one-time rate hike by the US central bank may have only a limited impact on the dollar's appreciation against currencies such as the euro, pound, Australian dollar, and New Zealand dollar. The Japanese yen, on the contrary, could further strengthen its upward momentum in this environment.

In conclusion, I would note that a rate hike should at least support a short-term increase in the US dollar's value in the Forex market.

Forecast of the Day:

AUD/USD

The pair is trading above the 0.7125 support level as the market awaits the Fed's rate decision. The pair could fall to 0.7074 if rates are raised. The 0.7120 level could serve as an entry point for selling. The stop-loss could be placed at 0.7154.

GBP/USD

The pair is trading near the 1.3474 support level. A rate hike would support the dollar and put pressure on the pair, which could fall to 1.3449 and then to 1.3408. The 1.3469 level could serve as an entry point for selling. The stop-loss could be placed at 1.3517.