Traders are still in the process of digesting the Fed’s decision which provided much-needed fuel for the US equity markets to rally. There were several key important messages for market players which have strengthened the overall risk-on sentiment. First of all, the Fed has made it clear that they haven’t won the war against inflation, but Jerome Powell, the Fed Chairman, balanced the statement by saying that the disinflation process has started. The Fed seems to be happy with the direction and the pace of the disinflation process. This brings us to the second important point that is going to continue to support the risk-on rally, and that is the upper limit in terms of interest rate, which the Fed indicated yesterday. Jerome Powell indicated yesterday that it is certainly possible that the Fed fund will most likely remain below the 5% mark. This upper limit mentioned by the Fed was in line with what the market participants have been thinking about so far. So, now the range of the Fed fund rate is most likely going to be between 4.50%-4.75%. This gives many businesses and especially banks, an idea about setting the interest rate.
Something which we think was overly optimistic in the Fed’s comments yesterday was that the Fed still thinks that they can bring the inflation rate to their 2% target. The doubt over here is not that the Fed can’t bring the inflation rate to this point but the cost it will pay to bring the inflation rate to this point. Remember, Jerome Powel said yesterday that the Fed is only anticipating a subdued pace for economic growth in 2023. So if it is going to be subdued growth, then it seems quite difficult to think about how the Fed will bring the rate close to 5%. The biggest worry among investors and traders is really about the potential threats of the economic recession taking place in the US, which both the IMF and now the Fed has kind of ruled out as both believe that economic growth is going to be slow. However, nothing is going to be extraordinary in a way that market players need to be worried about.
The final and the most important message from the Fed meeting last night was the Fed’s imitative of a rate cut. This is the most important point for market players from here onwards and is likely to be the centrepiece of attention for many. The Fed doesn’t believe that it will cut the interest rate process in 2023. For one reason, the Fed cannot give this message out clearly yet, especially when inflation is still far from its target. Secondly, giving an indication of an interest rate cut in 2023 would send a highly dovish monetary policy signal which could be extremely good for the US equity market. Traders do think that the odds are still strong that we may see a rate cut by the Fed this year, but a clear message on this is going to be appearing later in the year—for now, it is just too soon. The Fed will have to monitor economic growth, the direction of inflation, and how close it gets to its target.
Overall, the Fed’s meeting has given investors and traders more risk-on vibes. Now the focus is going to be shifting more toward the most important economic event of the week, which will be the US NFP.
BOE
As for today’s economic calendar, we do have two important economic events unfolding. Firstly, it is the Bank of England’s meeting. The bank is expected to increase the interest rate by 50 basis points. There are two important things to focus on here: firstly, the bank’s take on the interest rate and how long it thinks inflation will take to come close to its target. Secondly, where is the upper limit of the bank’s interest rate? Market players certainly think this number will be below the 5% mark, and many believe that this number is more likely to be between 4.5% to 4.75%, in line with what the Fed has. But the BOE’s comfort level is nowhere close enough to the Fed. Inflation is still immensely stubborn and recession threats are really serious. The bank has a limited choice but to continue to do what it is doing. However, we do expect the bank to define its upper limit of the interest rate today and that may bring relief for market players.
ECB
The second event which is worth talking about today is the ECB meeting and the bank is also expected to increase the interest rate by 50 basis points. Market players expect a series of these interest rate hikes in the coming months; the bank is more than likely to increase the interest rate by the same magnitude. Traders will be paying close attention to the bank’s decision and every single word will be synthesized by them.
Gold
The precious metal scored decent gains yesterday and it tested its support of 1,900 (nearly). The bulls are now sure that this support level is going to remain in place and the path of the least resistance is more skewed to the upside as the dollar index is more than likely to weaken in the coming days. The Fed’s decision has indicated that they will only increase the interest rate by a small number and days of aggressively hawkish monetary policy are over.
Gold prices could also experience higher volatility today on the back of the Bank of England and the ECB meetings as well. Both banks are going to announce their monetary policy and their decision impacts the risk-on or risk-off rally
Oil
Oil prices are standing on more stable ground as the Fed confirmed that they only expect subdued growth for the biggest economy of the world, the US, in 2023. This has made traders more comfortable with their long positions in oil and we may likely continue to see this rally going from here onwards. Another reason that oil prices are likely to remain stable from here on out is that OPEC itself announced yesterday no change in its supply. So supply seems to be tight, and demand appears to be getting strong. The net result in price could be a move to the upside.