A pessimistic mood permeated the markets ahead of the FOMC rate decision, with traders nervous that Jerome Powell might not be as dovish on the rate outlook as the market hoped.
With a 25-basis point rise essentially baked into the cake at this point, market direction would move further south if the Fed signals that the current rate-hike journey has not reached its final destination.
I expect we will see a quarter point hike by the Fed and I also think Jerome Powell will keep his options open regarding more rate hikes down the road subject to future inflation readings. But any outlook from the FOMC which strongly hints at more rate rises on the horizon could send risk assets into a tailspin on the prospect of an even more restrictive economic environment.
Yesterday we saw the RBA dent sentiment in the Australian market by raising rates to 3.85% after a brief pause in April. Whilst the aggressive policy moves and rhetoric by the RBA is not necessarily a harbinger for other central banks, it does signal a preference from policy makers to tackle the immediate issue of high inflation instead of setting policy based around the potentiality of a recession.
Because at this point, soaring inflation is staring central bankers in the face while a recession this year remains a possibility rather than a certainty.
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Aussie dollar gives up some gains
The Australian Dollar soared to over US$0.67 on the RBA move on Tuesday though it has since given back some ground as global equities retreated.
Risk aversion has given new life to the Yen which has been receiving solid buying flows on a safe-haven play and has allowed the currency to shake-off the effects of last Friday’s dovish BOJ comments.
Looking ahead to the Fed decision, the greenback will be at the mercy of US treasury yields which could be in for a wild ride during the statement by Jerome Powell. Interpretation of the Fed’s rate-setting intentions for the rest of 2023 will be top of the agenda for traders.
Gold benefits from a waning US dollar
Elsewhere, gold is receiving buying inflows courtesy of renewed risk aversion, whilst it is also benefiting from waning USD demand. Whilst the current risk-averse/softer dollar environment is suiting the precious metal, downside risks remain if US yields happen to rise as a result of a hawkish Fed. But that remains to be seen.
Oil on the backfoot
Meanwhile the oil is again on the backfoot as the price fell in sympathy with global equities. Questions over the health or otherwise of the global demand picture are plaguing the oil price at the moment, with the latest price slide coinciding with when the OPEC+ production cuts are due to commence, a development which likely won’t be pleasing for the OPEC+ members.
Market commentary and analysis from Tim Waterer, chief market analyst at KCM Trade