There was no surprise expected from the Fed. Still, with its commentary, the Fed managed a surprise anyway, influencing the price action for the European and US futures. The Fed increased the interest rate by 75 basis points, as they largely expected it. However, what was not expected by them was to show their hawkish hand concerning their forward guidance. The message which came out of the meeting last was that the Fed isn’t going to take its foot off the gas, which means that traders and investors should not be thinking of the Fed reducing the pace of interest rate hikes. The Fed believes that inflation is still a massive issue, and they do not feel that inflation will make a U-turn as rapidly as they wanted. This element triggered the sell-off in the US stock markets, and we saw all the major averages, such as the S&P 500, Nasdaq, and Dow Jones plunging on the back of the Fed decision.
Now, traders will be on edge after last night’s Fed comments. This is because we still have the main event of the week pending, the US NFP, which is due to come out tomorrow. The ADP number has already set a positive tone concerning this number; the ADP reading came better than expected.
For traders, what matters is that any strength in the economic data, especially in the US NFP data, or even if we do not see any substantial weakness in the US NFP data, the chances will be that speculators will amplify their bets with respect to the Fed’s monetary policy decision. In simple terms, what we mean by that is that any good news may not be that good as that would only give more ammunition to the Fed to be more aggressive with their interest rate approach.
Another critical factor that we also need to keep in mind is that the current stance of the Fed will likely choke the US economy from its growth. An aggressive stance on interest rate hikes will slow down the US housing market, and the US markets are also likely to struggle. So basically, threats of a potential recession are ever higher, and traders must be vigilant with their approach.
Another bank that will create a lot of noise in the markets today is the Bank of England. The BOE is expected to increase the rate once again. It is widely anticipated that the Bank of England will increase the interest rate by 75 basis points today. Traders have been hoping that the BOE may find some comfort in the Fed’s dovish tilt that they were expecting last night, but clearly, the Fed didn’t get the memo from the BOE as they did their own thing.
In contrast to the US economy, the UK’s economy is relatively weak, and a recession is imminent in the UK. The housing market has started to collapse, and it will be only a matter of time before we see significant defaults in the UK’s housing market. The reason is quite simple, the higher interest rate and cost of living crisis have pushed traders into the corner, and with every passing day, they have less disposable income in their pocket.
Another vital factor that traders will also be paying attention to during the BOE meeting will be the future trajectory of the BOE’s decision. We may hear some dovish tone from the BOE, but the reality is that even the dovish tone will not mean that the BOE will not increase the interest rate. The rates will still be higher, which means more pain for the consumer and possibly the collapse of the UK’s economy.