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Market participants are still digesting the news from the Federal Reserve, and the US market fell again yesterday.
The decision to raise interest rates by 75 basis points was not unexpected. However, Jerome Powell’s speech sent a huge shock to the US stock market.
The Fed has again made it clear that they are determined to control inflation at all costs. Market participants should not be mistaken in thinking that future rate hikes will not be the same, especially in November.
It’s almost a foregone conclusion that the Fed will hike rates by 75 basis points in November and 50 basis points in December.
U.S. stocks are under pressure as traders see a high probability of a U.S. recession. In fact, given the Fed’s aggressiveness in monetary policy, many believe the Fed is actually looking for a recession. However, the Fed did say last night that their monetary policy is largely dependent on economic data. But at the same time, they have glossed over their problems by adding that they expect some weakness in the labor market.
In simple terms, the message is that next month’s numbers and beyond may indicate that the U.S. labor force is slowing. This particular factor won’t change their strategy, as not only will they keep raising rates, but rates may actually stay there for a while.
It’s also worth noting in the Fed’s last speech that the Fed wants to see some correction in the housing market. It believes that the current growth in the real estate market is excessive and needs to be corrected. This has led many to believe that the U.S. housing market is in for a rough winter right now, and likely will be in the months to come. With interest rates currently above 5% in most parts of the country, the number of U.S. housing markets is likely to drop sharply.
BOE
All eyes are on the Bank of England today as the bank is due to announce its monetary policy decision. Traders expect rates to range from 50 to 75 basis points. A 50 basis point hike would be considered a dovish hike and a 75 basis point hike would be considered a hawkish hike.
We think the bank will press a button today, which it hasn’t done since 1989, to raise rates by 75 basis points. The reason is that BOE’s options are very limited. With the death of Queen Elizabeth II, banks delayed their monetary policy decisions by a week, giving them the opportunity to fully understand the Fed’s monetary policy decisions, which are affecting the U.S. dollar index.
In addition to raising interest rates, the bank is also expected to confirm plans to sell more £895bn of bonds – simply a further factor in reversing dovish monetary policy.
gold
As far as gold prices are concerned, traders are more concerned about the movement of the US dollar index. The fact that the index is on fire is taking the shine out of the precious metal. We did see lower prices last night, and that could be the trend in gold prices today as well. But at the same time, the sell-off in gold prices has not been as drastic as many speculators have been bracing for a full percentage point hike from the Fed, which did not materialize last night.
Currently, the path of least resistance for gold is highly skewed to the downside. The upcoming weekly jobless claims could bring more volatility to gold prices. But make no mistake, the Fed has indicated that the US labor market will experience weakness, but that won’t stop the Fed’s current monetary policy stance. –arab trade news agency
* Naeem Aslam is chief market analyst at Avatrade
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