- The Federal Reserve has raised rates by 75 bps as expected.
- Hopes for a slower pace of rate hikes have weighed on the dollar.
- A hangover from the initial euphoria is likely – even without strong US data.
The Federal Reserve is data dependent – that is the sole message traders need to take from the critical rate decision. The world's most central bank raised borrowing costs by 75 bps to 3.75-4.00% for the fourth consecutive time in this November meeting, but markets were already looking into December. That explains the cheerful market reaction.
Investors had already been clamoring for a dovish message from the Fed, clinging to any hint that the bank would slow the pace of hikes, starting from a 50 bps next month. They received their subtle hints from Fed Chair Jerome Powell.
Here is the market's goldmine, emphasis mine:
In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments
These lines imply that the Fed has done enough and may want to take stock of everything before continuing to act.
Is it a commitment to raise rates by only 50 bps in December? Not so fast. First, the Fed also takes inflation into account and "economic and financial developments." It remains data-dependent and data could imply further hikes.
Secondly, the sentence before the one above consists of a firm commitment to act.
The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
Fed officials maintain their tough talk on inflation – and they need to while the labor market is on fire and after core inflation hit the highest in 40 years. They need to be Rocky Balboa on inflation when their measure of inflation is at the highest levels since Eye of the Tiger was No. 1 on the charts.
The Fed has shown its ability to change its mind in response to the data, and there is lots of data until December. The Fed's two mandates are price stability and full employment. Two inflation reports and two Nonfarm Payrolls releases are due between now and December.
I argue that a strong data release is unnecessary to see the dollar recover. This relief rally has weak legs to stand on. Stocks may be experiencing a "bear market rally" – these are the strongest and prove premature.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Follow us on Telegram
Stay updated of all the news
EUR/USD stays below 1.0900 as Q1 comes to an end
EUR/USD has lost its traction and declined below 1.0900 in the American session on Friday. Quarter-end flows seem to be allowing the US Dollar find some demand but the risk-positive market environment seems to be limiting the pair's downside ahead of the weekend.
GBP/USD trades below 1.2400, looks to post weekly gains
GBP/USD has edged lower after having tested 1.2400 earlier in the day but remains on track to end the third straight week in positive territory. The upbeat mood remains intact after soft PCE inflation data from the US, making it difficult for the US Dollar to continue to gather strength.
Gold tries to stabilize near $1,980 following earlier spike
Gold price has returned to the $1,980 area following a spike above $1,987 with the initial reaction to lower-than-expected PCE inflation figures from the US. Meanwhile, the benchmark 10-year US Treasury bond yield stays in the red near 3.5%, providing support to XAU/USD.
Will Dogecoin price pull an XRP and rally 60% next week?
Dogecoin price has been in a tight range bound movement since November 22. The recent recovery above the range low looks promising and hints at an explosive move for next week.
Week ahead – Nonfarm payrolls to set the tone for US dollar
With the banking turmoil receding, market participants will turn their attention back to economic releases. The spotlight will fall on the US employment report.