As expected by the market, the Federal Reserve has increased its Federal Fund Rate by 75 basis points for a fourth consecutive month. However, the market is more interested in the comments made by the Chairman and general future guidance. Most analysts have advised that the press conference showed neither signs of an ultra hawkish nor dovish Fed.
Hawkish Fed
The Chairman of the Fed, Jerome Powells, advised that the FOMC believes interest rates will increase higher than originally anticipated. Analysts have advised that the Fed’s terminal rate may even be as high as 5.5%, which would be the highest in 15 years. This was the main hawkish comment made during the press conference, which sent the price of the US Dollar flying and US stocks crashing.
The price of the US Dollar Index has increased to 112.48 which is the highest since October 20th. The price of the US Dollar has specifically increased over the past 2 hours as the European and UK trading sessions were edging closer. For example, the EUR/USD has declined by 55 Pips over the past 2 hours. Furthermore, the DowJones declined by 1.65% in its largest decline since October 7th.
DowJones 1-hour chart on November 3rd
Dovish Fed
There was a dovish comment from the Fed, too, related to “resizing” of interest rate hikes. The market predicts this to be super close to happening, but the question remains, how close? The Chairman confirmed that the FOMC is aware that interest rate hikes will need to be resized but advised it would all depend on 2 factors.
The press conference indicated that the FOMC would only consider lowering the pace of hikes if they see less imbalance in the employment sector and a lower inflation rate. Therefore, tomorrow's NFP figures and the CPI figure scheduled for next week will be vital. The Fed will also consider December's NFP and CPI figures. The market has mainly priced in a 50 basis point hike for December, but this may change based on the above data.
Economists have voiced a word of concern regarding a higher terminal rate. Chief economist, Trevor Greetham, advised that the higher the interest rates go, without seeing inflation decline, the stronger the economy will fall. Currently the UK economy is at the highest risk of experiencing a recession. Let’s look at the GBP/USD below.
GBP/USD - BoE readies the biggest hike since 1989!
The GBP/USD has formed its third impulse wave and has crossed into a lower low this morning. The price is currently at its lowest since October 25th. From the major currency pair category, the GBP/USD is weakening at the fastest pace as the Bank of England’s decision edges closer. Currently, the technical indicators are signaling a downward trend but the price will strongly be influenced by this afternoon’s rate decision, votes and the Governor's speech.
GBP/USD 1-Hour Chart on November 3rd
The Bank of England is expected to join the 75 basis point clan but will most likely have a dovish tone afterward. This is where the Bank of England is likely to differentiate itself from the ECB and especially the Fed. In addition to this, the market will also be eager to see how many of the Monetary Policy Committee members will vote for 75 basis points. Overall there are 9 members. If the committee partially votes for a lower hike this can pressure the Pound higher.
UK’s Fiscal Policy
The Bank of England has been put in a difficult position by the UK government due to its decision to delay the new UK budget. If the fiscal policy was on the contractionary side, a lower hike may be necessary from the BoE, or a higher hike if it was more expansionary, such a Truss’ policy.
Traders should note that the price of the GBP will not only depend on the BoE’s policy but also on the government's fiscal policy which is scheduled for the 17th of November. Analysts expect the policy to be rather restrictive, considering the previous government’s disaster policy.
In the meantime, markets will turn their attention to the BoE’s rate decision and forward guidance, as well as tomorrow’s US employment figures.
Quick Summary:
- The Fed increases interest rates by 75 basis points as expected.
- Jerome Powells advises the terminal fund rate will most likely be higher than previously expected but indicates resizing at some point.
- US Dollar increases in value and US stocks decline
- Markets are waiting for BoE’s decision on its monetary policy, but investors also have one eye on the fiscal policy.
- Traders are eager to see tomorrow’s NFP results
