Interest Rate Hike Speculations Trigger Market Jitters: Dollar Dominance Rises

Last night’s FOMC Meeting Minutes gave investors the indications they were looking for regarding interest rates. All Fed participants see significant upside risk to inflation, which has already been seen this month as inflation rose from 3% to 3.2%. Most members of the FOMC signaled the upside risk may justify further interest rate hikes. However, the report also stated that two members believe another hike will risk economic stability. As a result, investors are pricing into the market a further 0.25% to 5.75%, but this will be the last hike for the foreseeable future. 

Due to the expectation of higher interest rates, shareholders sold shares throughout the second half of the US session. Investors considered shares a higher risk if inflation continues to climb along with inflation. Investors instead preferred Dollar backed investments. All equity indices declined since the FOMC Meeting Minutes, and European indices such as the DAX opened on a negative market gap. This again shows the negative effect of potentially higher interest rates. 

The FOMC also pushed the US Dollar significantly higher, and here traders can see a clear correlation between risk-based assets and the UA Dollar. Investors sold assets such as ETFs, shares, and even cryptocurrencies, opting for the Dollar. Investors chose a safer option, which is now predicted to offer higher yields. The US Dollar rose last night to 103.56, a 2-month-high. Positive economic data and higher interest rates support the Dollar this week. However, traders should note the US Dollar Index is trading 0.04% lower this morning. 

SNP500

The SNP500 ended the US trading session 0.76% and is down 1.85% lower this week. The SNP500 is experiencing the second-largest decline in the market after the NASDAQ, down 1.07%. The fall is primarily associated with two factors. The first is the FOMC meeting minutes indicating another rate hike. The other is investors holding onto any signs of negativity while ignoring positive data. This is due to traders being uncomfortable with the high price of equities while the recession risk increases. 

SNP500 1-Hour Chart on August 17th

Even though the S&P 500 has declined for two consecutive days, it must be noted that Chinese and Asian stocks have ended their session in the green. So we can see here that Asian traders have purchased the discounted price after recent declines. European investors are also seeing similar buying patterns. If Europe continues to buy closer to the US session open, investor sentiment can rise and support US stocks. Investors should note recent days have seen European equities unable to hold onto gains. 

In addition to this, the SNP500 is positively influenced by recent earnings reports. Last night, both Cisco Systems and Synopsys released their quarterly earnings report after the market closed. Both reports saw higher-than-expected earnings. The day before, Home Depot also released higher-than-expected earnings and revenue. Cisco, the 28th most influential stock with a weight of 0.59%, confirmed earnings almost 8% higher than expected and revenue 1% higher. Revenue was also higher than in the previous four quarters. 

Investors will now focus on Walmart’s earnings, which will be released in the next few hours. Walmart holds a weight of 0.61% and is trading at an all-time high. Analysts advise that the company could beat expectations as more individuals trade down on food and shopping. Also, analysts recommend investors may be more comfortable purchasing despite its high price due to its “defensive stock” status. 

Technical analysis points towards a minor retracement, but bearish signals remain on larger timeframes. If the price can break above $4,412, signs may arise indicating a correction back towards $4430.60. A decline below $4,403.60 indicates a further decline. However, investors should note that the price movement will also largely depend on Walmart’s earnings data.

GBP/JPY

The GBP/JPY exchange has surpassed previous highs and trades at ranges not seen since before Brexit. The exchange rate is beneficial for a currency that is rising against the market as a whole while the other depreciates. As a result, the exchange rate is avoiding a tug-of-war scenario. The Japanese Yen has mixed price movement so far this morning but has been consecutively declining against all currencies. 

Investors focus on the UK inflation data. The consumer price index fell from 0.1% to –0.4% and from 7.9% to 6.8% this year so far. However, the core indicator, closely monitored by the Bank of England, added 0.2% and remained at the same level of 6.9%. Both data sets were higher than expected, and the UK also saw salaries continue to rise this month. Therefore, investors believed the Bank of England would raise interest rates by at least 0.25%. The data and potential hikes supported the Pound against the Yen, which is struggling due to the dovish Bank of Japan. 

GBP/JPY 1-Hour Chart August 17th 

Currently, the exchange rate is forming at a resistance level of 186.329. If the price breaks above this level while the currencies are not seeing conflicting performances in the market, investors may interpret this as a bullish signal.

Summary:

• All Fed participants see significant upside risk to inflation, which has already been seen this month as inflation rose from 3% to 3.2%.
• Only two members of the FOMC believe another hike will risk economic stability and prefer a pause. 
• US stocks declined, and the US Dollar rose to renew monthly highs. However, Asian stocks bounced this morning. 
• The GBP/JPY exchange has surpassed previous highs and trades at ranges not seen since before Brexit.
• Both the UK CPI and Core CPI data remain higher than expectations.