London 21/09/2022

All eyes of the investing community are on the Fed’s interest rates decision later today. After the high inflation that was announced in the US last week, the probability of a 0.75% hike has increased to 82% while there’s an 18% probability for a 1% hike. Before the inflation announcement, the 1% was out of the subject and 0.50% had a chance as well. This upward shift has caused a drop in the stock markets and a strengthening of the US dollar. We need to see if markets have already consumed this shift, in the case of 0.75%. If the hike is 1%, most likely we will see a new big correction of the stock indices and an extra strengthening of the dollar. The press conference, 30 minutes after the rates decision is also important because a hawkish or a dovish tone for the future actions may be more influential to the markets than the current decision itself.
In the geopolitical scene, president Putin, earlier today has increased the negative sentiment in the markets with his statements. He said that “Russia has lots of weapons to reply to, it is not a bluff”, implying a possible usage of nuclear weapons. Markets reacted with more bears in stock indices, new strength for the dollar, and rising for the commodities, such as gold & oil. US 10-year bond yields have stabilized above 3.50%, which is the highest price since 2011.
EURUSD (current price at 0.9903) is bearish this week, following the strength of the dollar due to the expectations of the markets for a hawkish Fed, later today. Also, president Putin with his statements caused a new drop in the euro as the war carries on, with no visible light. Christine Lagarde yesterday said that the next steps of the ECB will depend on the course of the inflation but new rate hikes are very possible. The major support at 0.9865 (lowest price since 2002) remains the last obstacle before a very sharp downtrend for the pair. The decision on interest rates today will be very critical for the direction and the volatility of the EURUSD in the next period.

GBPUSD (current price at 1.1347) is very bearish this week and below 1.14 which was multi-decade support. The major reason is the expected divergence between the Fed and the Bank of England regarding the interest rate hike decisions. The Fed is expected to apply a 0.75% hike while the Bank of England may apply 0.50%. In case this scenario comes true, the US dollar is favoured. Also, president Putin’s statements earlier today have strengthened the risk-off mood and the traders prefer safer solutions (USD) instead of risky ones (GBP). As long as the GBPUSD remains below 1.14, the downtrend is established.

USDJPY (current price at 144.02) is bullish for the 6th week in a row. The strength of the dollar combined with the higher bond yields, help the pair to approach the important resistance of 145. The inflation was announced in Japan at 3% in August vs 2.6% in July which is a rate that starts moving away from the 2% target. Many analysts believe that the Bank of Japan will change its ultra-loose monetary policy pretty soon but for the moment, markets ignore this case and the bullish trend keeps going.

DISCLAIMER: The information produced by a-Quant is of a general nature only. It is not personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

Leave a comment