Interest Rate Roulette: Federal Reserve in Focus

In a financial twist that left the market’s predictions spinning, Christine Lagarde’s European Central Bank (ECB) shook things up last week. While many expected a different tune, the ECB decided to crank up its key interest rates for the tenth time in a row despite concerns about the economy’s activity. With its prices increasing at more than twice the target rate, the ECB felt it the most prudent decision for the zone’s economy despite the high borrowing costs and a downturn in the Chinese economy weighing on the overall economic activity. The Eurozone interest rates took a 25bps leap from 4.25% to 4.5%, while its key deposit facility rate hopped from 3.75% to 4%.

But, alongside this hawkish surprise, the ECB dropped a rare dovish note, suggesting that these new rates might play a significant role in taming the soaring inflation, currently at an elevated 5.3% versus the 2% target. Lagarde mentioned duration, suggesting that rates could stay elevated at this level for an extended amount of time. However, with the potential of a pause in the next meeting, investors rejoiced as European equities ticked upward, anticipating a possible pivot in the ECB’s rate hike spree.

And now, all eyes turn to the Federal Reserve’s upcoming decision on Wednesday, where the stage is set for an anticipated pause at 5.25% – 5.5% for the Federal Funds Rate, with the CME FedWatch Tool attributing a 99% probability in favour of this decision. Meanwhile, on Thursday, the Bank of England takes its turn in the spotlight, with consensus expecting a hike from 5.25% to 5.5%. While the respective decisions could move the market, the real showstopper could be the commentary from Jerome Powell and Andrew Bailey, similar to the ECB decision last week, as they could reveal the economic landscape’s backstage secrets as we journey forward. With the US experiencing a solid uptick in the oil price, and elevated inflation levels, a hawkish tone is expected in the outlook, which could pose a challenge to the equity market in the upcoming week.

Sources: Koyfin, CME Group, ReutersPiece written by Tiaan van Aswegen, Trive Financial Market Anal

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