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What did the Fed say?

What did the Fed say?

In our Daily Market Analysis, we often allude to the US Federal Reserve being the most influential central bank in the world.

And if we ever needed a reminder, just consider the wild price action across asset classes surrounding the Fed’s latest policy clues delivered overnight.

To illustrate, the following chart shows the wild gyrations recently in the DXY (the benchmark index used to measure the US dollar’s performance versus a select few major G10 currencies = EUR, JPY, GBP, CAD, SEK, and CHF):


Markets were clearly whipsawed as they reacted to the latest FOMC policy statement as well as Fed Chair Jerome Powell's commentary.


What did the Fed do and say on Wednesday (Nov 2)?

As widely expected, the FOMC decided with yet another 75-basis point (bps) hike, marking its fourth-consecutive move of such a jumbo-sized hike.

NOTE: The FOMC is the 12-person group within the Fed that actually votes on monetary policy (i.e. what moves to make in order to help the central bank achieve its economic goals pertaining to inflation and the jobs market).


BUT, the FOMC’s latest policy statement also included this new sentence …

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.

In simpler words, markets interpreted this to mean that the Fed is entering into the final phase of its rate hikes that have been ongoing since March.


As markets initially took this to be a relatively “dovish” statement:

  • The USD weakened …
  • Gold bounced higher …
  • The S&P 500 (benchmark index measuring overall performance of US stocks) also climbed


Then … Ka-Pow(ell).

Half an hour after the FOMC statement was released, Fed Chair Jerome Powell began addressing the media and the rest of the watching world (including yours truly) during his scheduled press conference.

Powell quickly quashed any notion that the Fed is ready for the so-called “pivot”.


What is the “Fed pivot”?

This is the idea that the Fed is close to being done with its rate hikes and could make a u-turn and start lowering interest rates in 2023.


3 takeaways from Powell

Powell pushed back against this “pivot” narrative by emphasizing these 3 key points:

  1. The Fed still has “a ways to go” and still has “some ground to cover” before the rate hikes are over.
  2. “It is very premature to be thinking about pausing” (although Powell did leave the door open for smaller-than-75bps hikes for the December meeting and beyond).
  3. The risk of not raising interest rates high enough to combat inflation is far greater than doing too many rate hikes.

    With the latter, should the Fed send the US economy into a deep recession, the Fed has proven its ability to help restore the economy as the US central bank did during the pandemic.


Markets then duly ramped up their expected peak for US interest rates to 5.17% by May 2023, higher than the prior forecasts at the start of this week for a 4.8% peak by March.

As a result, spot gold and the S&P 500 swiftly unwound its knee-jerk gains and stumbled substantially lower.




Going into 2023, what does all this mean for:

  • EURUSD: The world's most-popular FX pair is set to find itself on a slippery slope, struggling to register notable gains while holding a bias for more declines.

    On one hand, the US dollar should have an easier path climbing higher then falling lower as long as the Fed keeps sending US interest rates higher.

    On the base currency side of EURUSD, the euro is beset by the economic woes for the Eurozone, which may place a lid on how high the European Central Bank can send its own benchmark rates.

    According to models, from current levels:
  • EURUSD has a 68% chance of touching 0.95 by Q1 2023
  • EURUSD has a mere 10.6% chance of touching 1.10 by Q1 2023


  • Gold: The precious metal is expected to remain suppressed.

    ​​After all, spot gold’s 11.5% year-to-date drop (at the time of writing) has been primarily due to its year-long nemesis of rising US interest rates.

    According to models, from current levels:
  • XAUUSD has a 48% chance of touching $1550 before 31 December 2022.
  • XAUUSD has a relatively lower chance of 25.5% of touching $1750 by year-end.


To be clear, the Fed’s ongoing rate hikes are having a major impact across other major asset classes as well.

US stocks are unlikely to stage a sustained recovery until markets know for certain when the Fed is done (or close to being done) with its rate hikes. Even Chair Powell himself confessed that he himself doesn’t know where or when US rates will reach its peak.


Key things to look out for in deciphering the path forward for US interest rates:

  • November 4 (tomorrow): October nonfarm payrolls (NFP a.k.a jobs report)
  • November 10: October consumer price index (CPI a.k.a. inflation)
  • December 2: November NFP
  • December 13: November CPI
  • December 14: next FOMC meeting

Recall that the Fed’s two main goals pertain to inflation and the US jobs market.

Hence, the Fed wants to see US inflation come down, perhaps by way of a softer (or weaker) hiring in the world’s largest economy.


If the US economic data does reveal signs that the Fed rate hikes are indeed having the intended effect (slower hiring, slowing inflation) that could herald much rejoicing in battered asset classes (think stocks, gold, and even cryptos).

Until then, the guessing game continues for investors, traders, and even Fed officials, as to where the peak for US interest rates lies, with potentially a lot more volatility in the interim.






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