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10.08.202207:10 Forex Analysis & Reviews: Most likely scenario of FOMC meeting in September

Exchange Rates 10.08.2022 analysis

The main US indices – DOW Jones, NASDAQ, and S&P 500 – edged lower on Tuesday, descending for the third consecutive day. Could that be the beginning of a new downtrend cycle in the US stock market? As a reminder, we believe that the bear market is not over yet. A few weeks ago, it was possible to assume the Fed would stop once the interest rate reached 3.25-3.5%. Today, it seems unlikely. Inflation is still on the rise, and the benchmark rate is already at 2.5%. Thus, if the US regulator announced a 0.75% rate hike the following month, the monthly forecast would become a reality. Indeed, the rate of 3.25-3.5% could have been priced in the current exchange rates in the stock market as well as that of the US dollar. However, FOMC members now suggest that the interest rate could exceed 3.5% and even be over 4%. This scenario seems more likely to unfold in the last six months of 2022.

Of course, a lot will depend on inflation. By the way, the July results will be published today. Should the figures drop by at least 0.50%, the possibility of a 0.75% rate hike will decrease. Overall, any significant fall in inflation would mean the interest rate could be raised by 0.5% in September. However, many experts, as well as the Fed, say inflation has not even peaked yet. In other words, consumer prices will continue to grow despite the fact that the interest rate is now closer to the neutral level. Meanwhile, Governor Bailey sees inflation in the United Kingdom at a rate of 13%. Yet, a few months ago, UK inflation was forecast to come in at 10%. So, inflation in the country is rising despite the aggressive Bank of England. Generally speaking, record inflation is a headache for the world's central banks in 2022, and it is likely to accelerate further in the next few months. In our view, the July report will hardly show a noticeable fall from June. This is exactly how inflation should react to tightening – to slow down gradually. Still, such a small drop can hardly be called significant. Therefore, we believe the Fed will raise the rate by another 0.75% in September and stick to the aggressive monetary approach.

*La presente analisi del mercato ha un carattere esclusivamente informativo e non rappresenta una guida per l`effettuazione di una transazione.

Paolo Greco,
Analytical expert of InstaSpot
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