EditorEditor: Alison HeyerdahlUpdated: June 22, 2023
AuthorAuthor: Chris Cammack

Last Updated On June 22, 2023

Chris Cammack

As expected, today’s FOMC meeting resulted in a 25-basis point hike in interest rates. The market´s response was subdued; this hike had been priced in for some time. The USD immediately slumped against all major currency pairs. The EUR, GPB and Gold spiked before falling back to consolidate steady gains.

What the market is really interested in now is whether this is the end of the road for the Fed´s tightening, a pause, or just a deceleration. Arguments abound for all three possibilities, and mixed messages from the FOMC statement and from Fed Chairman Jay Powell don´t make it any easier to predict.

The FOMC statement in the immediate aftermath of the hike announcement read:

The Committee will closely monitor incoming information and assess the implications for monetary policy in determining the extent to which additional policy firming may be appropriate to return inflation to 2 per cent over time.

The sheer quantity of uncertainty in that sentence almost renders it incomprehensible: “will closely monitor”, “assess the implications”, “in determining the extent”, “may be appropriate”. The market immediately saw this as a signal that the FOMC will likely hold interest rates at the next meeting – or is strongly amenable to the idea anyway.

This makes sense in the aftermath of the (eventual) collapse of First Republic Bank earlier in the week, raising further fears for the US banking sector and almost certainly heralding the arrival of a credit crunch and a US (and possibly global) recession in the second half of the year.   

But then Jay Powell came out after the release and immediately emphasised that a “decision on a pause was not made today” and that getting inflation down “has a long way to go”. He also reiterated the Fed´s stance that the US banking system is in good shape despite the rolling crisis in smaller lenders.

As Powell spoke, the EUR, GPB and gold lost all their gains against the USD and ended up back at square one. The markets know nothing more than they did before the FOMC release, and the cycle of uncertainty continues.

What is increasingly clear is that these are – while not unpredictable – certainly interesting times for the markets. The Fed, like traders, are in a reactive mode, being guided by data as it is released. While this may be the right decision considering the fragile state of the US economy, it means there is no clear path for markets or traders.

EUR/USD traders will now turn their attention to the ECB´s rate decision tomorrow. A continued hawkish response is expected by the ECB which will again put pressure on the USD. But as long as the Fed keeps living in the moment, don´t expect clarity any time soon.

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