Markets prepare for US Interest Rate hike after 10 years

Dec 16, 6:58 am
US Fed Cleveland

It’s Fed day as the US FOMC concludes its two-day meeting. At 19:00 UK time, the Federal Reserve will be presenting its monetary policy statement including the Fed’s staff economic projections. Expectations are for the Fed to hike the US interest rates by 25bps at today’s meeting. Thirty minutes later, Fed Chair, Janet Yellen will be holding a press conference and provide forward guidance.

The Fed’s meeting today gains great attention as the US Central bank prepares to hike rates in nearly a decade marking the end of an era of lose interest rates policy. In the world that has heavily in debt in US Dollar, the rate hike is no doubt going to have far reaching consequences and the market reaction could be just that, from bonds to equities and currencies including the emerging markets.

The event has garnered a lot of attention this year with the initial rate hike plans being pushed off in June/July and later postponed in September. While the markets at one point ruled out a rate hike this year, the Fed’s October statement sent a sharp reminder to the markets that December was still a ‘Live Meeting.’ Various Fed members ahead of the blackout period have managed to convey to the markets that it was time for the US economy to break away from the crutches from the stimulus and easy money policy. Heading into today’s Fed event, the markets will be looking at the following points.

Fed Rate hike: Expectations for a 25bps hike bringing the US benchmark interest rates from <0.25% to <0.50%

Fed’s Staff Economic projections: The famed ‘Dot-Plot’ will show where the Fed members stand in terms of inflation, GDP and unemployment forecasts into the next quarter. Expect the ‘Dot plots’ to add noise to the rate hikes

Press Conference: A good 30 minutes after the Fed releases its interest rate decision, Janet Yellen will be holding a press conference. These crucial 30 minutes are likely to see the markets turn frothy at the very least.

Forward Guidance: In terms of forward guidance, the markets will be looking at how quickly the Fed will hike next. Expectations are for the Fed to hike at the next quarter, around March 2016 where a press conference is scheduled. Missing the March 2016 window would still put April’s meeting in focus which currently does not follow up with a press conference, which leaves June as the next likely date for the Fed to hike rates. Considering that the US will be heading for Presidential elections next November, the Fed would prefer to deliver another rate hike and stay put until the elections are done with. As such, the Fed could, in all probability hike rates once next year with an optimistic view of delivering two rate hikes in 2016.

With yesterday’s inflation numbers showing that consumer inflation is finally starting to move higher after staying flat for the most of this year, the Fed would be keen to signal its willingness to move quickly when possible. However, the Fed could take a dovish stand by noting that future rate hikes would be data dependent. In short, today’s rate hike decision could be a ‘Dovish Hike’ so as not to upset the markets too much considering the prolonged period of time that the markets have gotten used to easy monetary policy.

Ahead of the Fed meeting, US building permits and housing starts numbers will be released, which could add to some pre-FOMC noise. However, the US Dollar should start to strengthen as we get close to the 19:00 UK time deadline especially on EURUSD long covering and considering a good 30-minute time difference into the press conference. Also, consider the Fed’s dot plot forecasts which could upset any US Dollar rally into the event.

Once the press conference starts off, the US Dollar is likely to move into a range before seeking its directional bias. The daily chart for the US Dollar Index shows price breaking out from the falling wedge pattern with yesterday’s session closing on a bullish note. The upside momentum is likely to send the Dollar Index to 98.61 at the very least to as far out as 99.28. If price fails at this level expect a strong correction on the US Dollar Index which could see a test to 97.28 support followed by 96.64 – 96.36 support.

US Dollar Index - Daily Chart
US Dollar Index – Daily Chart
(Visited 15 times, 1 visits today)

John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

Follow Me:
Twitter