On Tuesday, financial markets around the world continued to fluctuate amid high volatility before the likely hopeful result of the Fed's monetary policy meeting. Investors are wondering if J. Powell will announce that the first interest rate hike after the pandemic will take place at its March meeting or not.
So far, traders' consolidated opinion is expressed in the fact that the Central Bank will make it clear that it is preparing for the concept of the rates in March. These expectations led to a collapse in the global stock markets, which was most noticeable in the fall of the US stock indices. It declined from 2.09% (DOW) to 5.59% (NASDAQ) since the beginning of the month. It showed that the fall on Monday was the strongest, but the recovery also turned out to be significant, and they even managed to close in the positive zone.
The currency market slowly reacted with the dynamics of the US dollar to the expectation of an earlier rate hike, which can be explained by two reasons – either market participants have already considered the rate hike factor in March, or, which, in our opinion, is more likely, they are not very sure about it. A similar picture is observed in the public debt market. The yield of the benchmark 10-year Treasuries over the past few trading sessions amid volatile trading has remained in a very narrow range, around 1.775%, which can also confirm the assumption that there is no absolute certainty that Powell will announce the prospects for the start of rate growth in March.
Assessing the current situation on the markets, we still believe that the possibility of Powell's softer rhetoric at the press conference following the Fed meeting still exists. We have already described the reasons for this view more than once in previous reviews.
If after the meeting, the Fed Chairman tries to avoid the topic of the first rate hike in March and talks about the slowdown of inflation, then investors will regard this as a possibility that rates may not be raised in March. In this case, the correction in the stock markets will end and they will resume growth. The demand for commodity assets will also increase, gold will receive support, and the US dollar will be under pressure.
However, if Powell mentions the need to raise rates in March, then the opposite development of events can be expected.
We believe that the probability of the first scenario is very high.
Forecast of the day:
The EUR/USD pair will receive support and rush to the level of 1.1385 if the first scenario is implemented.
The spot gold price may also increase towards the level of 1875.00.