FED’s Interest Rate Decision Impacts Markets
What a run the market has had over the past couple of weeks. We are potentially moving into a highly volatile period due to the next FED interest rate decision and the US Mid-Term elections. In today’s report, we are dissecting the different scenarios and pairing them with technical analysis across the FX, crypto and CFD markets, which should provide trading or investment opportunities in the coming weeks.
This week the FED is expected to increase interest rates again by 0.75%. Taking the nominal rate from 3.25% to 4%. With another large rate hike due, there are several scenarios to watch out for.
Firstly, UPTOBER did not disappoint. If you have been following our analysis over the past couple of months you would know we were expecting a bullish move throughout October. In our cryptocurrency market update, I shared a chart of the historic performance during October. It was frightening how accurately this played out – a dip into the 7th of October followed by a rally across risk-assets.
October Historic Performance Chart:
What to Expect from the FED’s November Rate Hike
With the FED interest rate decision due on Thursday morning and the US Mid-Terms due on the 8th of November, be aware of a dip leading into the Mid-Terms before a bullish move towards the mid-end of November.
Firstly, the market will need to navigate through the next FED interest rate decision on Thursday morning.
FED INTEREST RATE DECISION
Potential scenarios:
- The FED hikes by 0.75% and signals a continuation on the aggressive rate hike path in an attempt to cool inflation (HAWKISH & Bearish for risk-assets)
- The FED hikes by 0.75% and signals they may slow the pace of the rate hikes early in 2023 (Less HAWKISH – neutral for risk-assets)
- The FED hikes by 0.75% and signals they may need to reduce the size of the rate hikes in its next meeting – December (Slight DOVISH tilt & a bullish tilt for risk-assets)
- The FED hikes by 0.75% and pauses any future rate hikes – (DOVISH & bullish for risk assets)
- The FED hikes by 0.50% and remains data dependent (DOVISH & bullish for risk-assets)
What we know so far:
Central banks around the world are showing signs of a slowdown on the QT intervention. The Bank of England has taken measures to purchase UK GILTS (Quantitative easing), the BoJ is intervening in the markets to keep interest rates artificially low, the RBA and BoC have already reduced the size of the previous interest rate hike, the ECB is intervening in the markets to bail out energy companies.
Will the FED be the next central bank to ease away from aggressive interest rate hikes?
Potentially…
And this is one of the reasons risk assets have taken a bullish turn to the upside. Due to the strain and liquidity drying up in the financial markets, the US Treasury has signalled the possibility of bond buybacks. Pumping liquidity back into the market.
A financial market meltdown may unfold if the FED continues to hike rates this aggressively. Rumours of a soft FED pivots have surfaced in recent weeks.
However, this has not been confirmed. If the FED holds firm due to inflationary pressures, expect a sharp correction across cryptocurrencies, stocks, and equities – and another rotation into the US Dollar Index (DXY).
On the other side of the coin. A stock market melt-up/blow-off top is also a possibility.
If the FED signals they will pause interest rate hikes due to financial market instability, you can guarantee investors will rotate out of the US dollar index (DXY) and back into risk assets. A sharp rotation will result in a large pump across risk assets.
The FED is not one for major surprises. They generally lay the groundwork before making any big decisions. Therefore the middle scenarios highlighted above are the most likely.
US MID-TERMS
This month, not only do we have the highly anticipated FED interest rate decision, but the US Mid-Term elections are due on the 8th of November. Historically speaking, the US Mid-Terms has provided a bullish outlook.
There is a high possibility of the Democrats losing the House. The Senate is up for debate. If the Democrats lose the House and remain in control of the Senate a bullish sentiment should unfold. When a single party controls both areas, policies favour a certain outlook/department/ or economic sector can be passed without pushback.
Whereas, when there is a split in the control of the House and Senate, extreme policies are harder to push through. This is one reason the market has pushed higher throughout October. Speculation has grown that the Republicans will take control of the House. Whatever the outcome, the results may have significant impacts on US fiscal policy, tax policy and legislative agenda for the next two years.
Possible outcomes:
- Democrats remain in control of the House and Senate – BEARISH
- Democrats remain in control of either the House or Senate and Republicans take control of either the House or Senate (BULLISH)
- Democrats lose control of both the House and Senate (potentially bullish)
If Republicans secure a majority in both chambers of Congress, many of the key items on the Democratic legislative agenda would likely not be able to make it through Congress. This means that tax increases, legislation on tech companies, fossil fuel regulations and further bills on climate or the environment are all likely to be off the table for the foreseeable future. I see this as a bullish outcome for risk assets.
Technical Analysis:
DXY
10 out of the last 13 years, November & December have been bearish months for the US Dollar Index. This is due to the positive sentiment leading into the holiday season. Investor confidence returns and equity rotates out of the safe haven currency and into risk assets.
We can see the DXY trading at the top end of a major channel structure, drawing in selling pressure.
However, something to keep an eye on is the recent price action appears to be an A-B-C corrective decline. The ABC corrective decline appears to be incomplete to the downside, therefore a final push lower into the FED interest rate decision is on the cards.
Until a clear 5-wave decline unfolds we need to be aware of a possible continuation to the upside.
The Trading Floor is currently long on the AUDUSD as we are expecting a bullish move into the FED decision on Thursday.
AUDUSD
Cryptocurrencies:
I have provided a detailed technical breakdown of the DXY, Ethereum and Bitcoin. You can head to the webinar by clicking here:
In short – Ethereum is following our Elliott Wave pattern correctly. We are now waiting for the next corrective decline before taking the next long trade opportunity. IF this Elliott wave count is correct, a move into the 2300-2500 area is on the cards over the Christmas period.
We have a very busy NOVEMBER upon us. Expect heightened volatility over the next 2 weeks. As always I will keep you posted on any major updates in telegram and in the Trading Floor.
Good luck in the markets.
Tony Fernandez
Head Market Analyst
