It is that time of the month again for the Federal Reserve, with the upcoming interest rate decision leaving the market on alert. While it is widely expected for the Federal Reserve to pause its hiking cycle on Wednesday, an unexpected plot twist can not be taken off the table. Traders are bracing for a whirlwind quarter ahead, juggling the wild cards of inflation, jobs data, and the fear of an impending recession. However, there are certain key indicators traders can look out for to maximize their chances of successfully navigating the volatile market.
On Wednesday, the Federal Reserve will step up to make its highly anticipated interest rate decision. According to the CME FedWatch Tool, there is a 77.1% expectation for the Fed to pause its hiking cycle, keeping the Fed Funds Rate unchanged at 5%-5.25%. Adding to this expectation was the dovish rhetoric inherent in the speeches delivered by Fed officials. Federal Reserve governor Phillip Jefferson signalled a potential ‘skip’ next week in order to assess further information on the state of the economy. Additionally, Jerome Powell’s outlook shifted to dovish as the risks of doing too little to restrict the economy started to balance out with the risks of doing too much. Heading into the upcoming quarter, the Fed will likely weigh up the risks of persistent inflation and a strong labour market to the risk of forcing a credit crunch and potentially tilting the economy into a recession in latter quarters as the restrictive monetary policy starts taking effect.
When analyzing the numbers, the year-on-year inflation rate currently stands at 4.9%, moderating slightly from 5% in the prior period. Similarly, core inflation moderated from 5.6% to 5.5%. However, the Fed’s preferred inflation gauge, the PCE Price Index, unexpectedly rose from 4.6% to 4.7% in the previous release. Mixed signals were also inherent in the recent jobs data, with the Non-Farm Payroll (NFP) number soaring to 339K from the prior 294K, despite the expectation for a contraction to 190K. However, unemployment ticked up to 3.7% from 3.5%, while wage growth slowed from 4.4% to 4.3%. Updates and developments in these metrics could be crucial in determining whether the Fed will continue on its restrictive path in July, with the first update on inflation due on Tuesday, which could give traders an insight into the progress the Fed has made in its fight against sticky price pressures.
If the Federal Reserve opts to pause on Wednesday, we could see an influx into riskier assets, such as the equity market. The S&P 500 has recently entered a bull market, and a dovish decision could catalyze a continuation of the strong equity market performance at the expense of the US dollar, as safe-haven demand could wane. However, gold (XAUUSD) could be in a prime position for an upside if the mood remains dovish in the press conference, as the non-interest bullion looks attractive to traders and investors alike to have a hedging component to their portfolio without the adverse effects of higher interest rates. Conversely, a hawkish tone in the press conference could lead to a safe-haven influx, which could benefit the US dollar, at the expense of both gold and the equity market, with investors looking for safety.
Heading into the upcoming quarter, the market could keep an eye on developments in inflation, the jobs market, and comments on the credit conditions in the aftermath of the banking crisis to gauge the Federal Reserve’s next potential interest rate move in July.
Sources: Koyfin, CME Group, Federal Reserve Board
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