Federal Interest Rate Decisions and Jerome Powell’s Speech

The world impatiently awaits the upcoming federal interest rate decision, accompanied by Federal Reserve Chair Jerome Powell’s speech.  Ahead of the decision, the US Bureau of Labor Statistics released the US CPI, which measures changes in prices and reflects on the changes in inflation rates. The CPI rose 0.1 percent in August –  which was immediately reflected on the market – weeks before the Fed announces its interest rate decision.

Market’s volatility and traders’ proactivity

US markets tend to be very volatile whenever the interest rate decisions will be released by the Fed, or whenever there is an expectation of an announcement by the Chair.  However, it seems that traders already anticipate what the Fed’s rate decision will be, causing the US markets to experience high volatility a week ahead of the official release. This has strengthened the US dollar, giving it superiority against foreign currencies, gold, and indices. The US Dollar Index, commonly known as DXY, which measures the value of the US dollar against a basket of 6 foreign currencies, has reached a two decades high this month. This has given investors a lot of confidence in the US dollar and giving it the title of “safe haven”.

Gold, on the other hand, took the opposite trajectory from the dollar, decreasing to its lowest levels since April 2020. Indices also dipped in negativity, while investors exit high risk investments as an attempt to manage the risks taken by their trades. The scenarios that the market was anticipating following the interest rate announcement have already played out a week prior to the event, as a result of the proactive behavior of traders. The outperformance of the USD has had a deteriorating impact on cryptocurrencies, especially those that trade majorly against the USD.  For instance, the majority of Bitcoin and Ethereum trades happen against USD, with the Bitcoin declining more than 14% in the past 7 days.

What to expect after the decision?

In essence, the market’s reaction to the Fed’s interest rates decision has already taken place prior to it. Hence, it is believed that the interest rate decision alone will  not shift the markets to a more volatile state. All eyes, however, will be on the Fed’s press conference and the upcoming speech of Fed Chair, Jerome Powell.

If the Fed announces that they will be taking further procedures for tightening the monetary policy to combat inflation, with hawkish signals, then the dollar is expected to continue its fierce inclining trajectory. In contrast, if the Fed signals to the existing fears that the US economy is in a state of recession, while at the same time cementing the decision for the continuous increase of interest rates, then the USD is expected to continue increasing, but indices would deteriorate. Gold, on the other hand, is expected to move first in a bearish wave followed by an ascending trajectory moving in a bullish wave after the higher trading volume on gold.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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