On Wednesday, 4 May, the US Federal Reserve will make a decision on interest rates. The market consensus is that the hike could be as much as 0.5 percentage points, which could be the largest interest rate increase in 22 years.
Financial markets have long been getting used to the idea that the US dollar could become more expensive and harder to access. During the financial crisis and during the pandemic, dollars were not in short supply. Presumably, anyone who wanted to borrow dollars could do so, and on very favorable terms. Financing transactions with dollars could have been easy, fast, and cheap. It seems that with the growth of the monetary base and the ease of raising dollars and social transfers during the pandemic, many markets could have benefited. Stocks or cryptocurrencies became more expensive, and the bond market could have continued to pump the bubble.
A change in the Fed's approach could mean that the USD could attract money like a magnet. If its interest rate rises to 3 or 3.5 percent at the end of the hike cycle, as the market now seems to be pricing it, there could be more people willing to hold USD deposits or US bonds than before. During the pandemic, investors could buy all sorts of assets with the easily accessible dollar. Currently, they can sell them, returning to USD and counting on its higher interest rate.
From the beginning of the year to today, the Nasdaq 100 index has fallen more than 20 percent, 30-year U.S. bonds have lost nearly 13 percent of their value, the S&P 500 index has lost 12 percent, and 10-year U.S. bonds are nearly 9 percent cheaper than they were in early January. Bitcoin is down 16.5 percent since the beginning of the year, ETH is down 23 percent, and the Fed has yet to begin a real and aggressive hiking cycle.
From this perspective, one may wonder to what extent the markets have already priced in a US interest rate hike. Thus, to what extent the mentioned declines in various asset classes and the strengthening of the USD are already in the prices. Can the market classically discount the future six months ahead, and will the Fed meeting be like the stock market adage - buy the rumor, sell the fact? We will find out on Wednesday evening.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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