The Federal Reserve has been steadily raising interest rates in an effort to combat rising inflation, which currently stands at 6.5% in America. On Feb. 1, the Fed lifted its benchmark interest rate another 0.25 of a percentage point to a range of 4.50% to 4.75%. This is the highest level in more than 20 years and it has signaled a warning to rapidly growing, unprofitable companies that need to borrow heavily to fund their expansion.[0]
Recent research has shed light on the effects of the US monetary policy on foreign firms.[1] It showed that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods.[2] Moreover, financial factors play a role, as US monetary policy spillovers have a much smaller impact on firms that are less financially constrained.[2]
The US dollar remains under pressure despite the positive pressure on US yields.[3] The 50-DMA offers remain a solid resistance to a bullish breakout.[4] The EURUSD remains bid at around the 50-DMA, and the dollar-yen remains offered into the 50-DMA.[4] That 50-DMA mark is the key resistance that must be cleared to set the dollar bulls free for further appreciation, and de-block the situation in the FX space.[4]
A shift in sentiment on Federal Reserve policy is emerging in interest-rate options, where several big wagers on the central bank’s benchmark rate reaching 6%, nearly a percentage point higher than the current consensus, have popped up this week.[5] As of Thursday’s close, the US swaps curve had priced in a peak level of 5.12% for the Fed’s benchmark rate around midyear, up from 4.91%.[6]
Fed Chair Jerome Powell has not indicated that the central bank is planning to start cutting rates at any point in 2023.[7] However, he did note that further rate increases were likely at hand, but also that the Fed would follow the data.[8]
For investors, this means that active management is key to navigating the markets in the coming months. Low priced companies with the highest upside potential in these volatile times are the first to consider.[9] Lastly, investors should pay close attention to next Tuesday’s CPI release. It could result in a sharp pullback in the equity rally if inflation numbers don’t show the easing expected.[10]
0. “3 Stocks to Sell After the Recent Fed Rate Hike” InvestorPlace, 5 Feb. 2023, https://investorplace.com/2023/02/3-stocks-to-sell-after-the-recent-fed-rate-hike
1. “How Much Can the Fed’s Tightening Contract Global Economic Activity? – Liberty Street Economics” Liberty Street Economics -, 13 Feb. 2023, https://libertystreeteconomics.newyorkfed.org/2023/02/how-much-can-the-feds-tightening-contract-global-economic-activity
2. “How Much Can the Fed’s Tightening Contract Global Economic Activity?” Forex Factory, 13 Feb. 2023, https://www.forexfactory.com/news/1205370-how-much-can-the-feds-tightening-contract-global
3. “Bets that US rates will peak at 6% weigh on sentiment [Video]” FXStreet, 10 Feb. 2023, https://www.fxstreet.com/analysis/bets-that-us-rates-will-peak-at-6-weigh-on-sentiment-video-202302100929
4. “Fed President Jerome Powell keeps saying that the Fed’s fight with inflation is not done yet” FXStreet, 9 Feb. 2023, https://www.fxstreet.com/analysis/fed-president-jerome-powell-keeps-saying-that-the-feds-fight-with-inflation-is-not-done-yet-202302090733
5. “Traders Are Starting to Put Big Money on the Fed Going to 6%” Yahoo! Voices, 8 Feb. 2023, https://www.yahoo.com/now/traders-starting-put-big-money-162445600.html
6. “Traders are Betting the Fed Will Raise the Overnight Rate to 6.0%” Stock Investor, 13 Feb. 2023, https://www.stockinvestor.com/56436/traders-are-betting-the-fed-will-raise-the-overnight-rate-to-6-0/
7. “Will the Fed end the 2023 market rally?” kuna noticias y kuna radio, 1 Feb. 2023, https://kesq.com/news/2023/02/01/will-the-fed-end-the-2023-market-rally/
8. “Further Interest Rate Hikes On The Menu” MENAFN.COM, 9 Feb. 2023, https://menafn.com/1105546971/Further-Interest-Rate-Hikes-On-The-Menu
9. “Is This the End of the 2023 Market Rally?” Entrepreneur, 3 Feb. 2023, https://www.entrepreneur.com/finance/is-this-the-end-of-the-2023-market-rally/444342
10. “The 6% Bet” Action Forex, 10 Feb. 2023, https://www.actionforex.com/contributors/fundamental-analysis/485735-the-6-bet