Yesterday we saw the long-awaited decision by the US Federal Reserve on interest rates. The range for the federal funds rate was raised by 75 bps to 3.75-4.00 percent, in line with market expectations. US interest rates are presently at their highest level since 2008. How did the dollar exchange rate react to the decision?
The dollar and the interest rate hike
The U.S. currency, as well as related markets, including gold or silver, but also U.S. stock indexes, seemed to react to the Fed's decision with increased volatility. At first, the U.S. dollar lost value, only to make up the losses during Jerome Powell's press conference. This could have had to do with the fact that Powell dashed the market's hopes for a quick end to the interest rate hike cycle, which he made clear during the conference. U.S. Federal Reserve Chairman Jerome Powell stressed on Wednesday that it is very premature to think about halting interest rate hikes. Powell also added that "no one knows whether there will be a recession, and if so, how dangerous it will be." The road to a soft landing has narrowed, but it is still possible. Powell stressed that spending growth has slowed and the labor market situation is still good. Inflation is well above the Fed's target, and recent inflation data have been above expectations, but long-term inflation expectations remain "well-anchored" - The Fed chairman noted in statements quoted by the BBN service.
Reaction of the dollar exchange rate after the Fed decision
Source: Conotoxia MT5, EUR/USD, H1
The EUR/USD pair's exchange rate approached parity shortly after the decision, only to fall towards 0.9800 at the end. This could be related to the still high expectations for further interest rate hikes by the Fed. On the morning of November 3, federal funds rate futures indicated that a 50bp hike could occur in December. In February 2023, the market expects another 50 bp hike and only in March 2023, after the last hike from 25 bp, is the end of the cycle expected. The market today is pricing the end of the cycle at 5.00-5.25 percent, and only next December could see a 25bp rate cut in the U.S. to 4.75-5.00 percent, according to futures and CME exchange data.
Stock markets with a bump after the Fed
The Nasdaq fell 3.4 percent yesterday, the S&P 500 fell 2.1 percent, and the Dow Jones fell more than 1.5 percent. Higher interest rates, typically also mean higher interest rates on bonds and the U.S. dollar, instruments with potentially little investment risk. The higher the interest rates and the lower the risk, capital could turn away from riskier assets until they are attractively priced relative to the risk-free rate. Hence, Wall Street may continue to be under pressure until companies' earnings prospects improve or their prices become more attractive relative to interest rates.
Nevertheless, interesting companies may emerge in such an environment. One of them may be Boeing, which stands out in the Dow Jones index. The company's share price has risen 6 percent in the past week, and is up 16 percent in a month. The company reported yesterday that it could generate free cash flow of $3 billion to $5 billion in 2023, and $10 billion by the middle of the decade, as it believes it would be able to outsource the delivery of the last of its 737 and 787 aircraft to airlines, its CEO David Calhoun said on Wednesday, as quoted by BBN news service.
Source: Conotoxia MT5, Boeing, Weekly
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Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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