Perhaps the most fateful Federal Reserve meeting in recent memory will start today. Investors are anxiously awaiting not only the decision on the next interest rate hike, but also on the further pace of their increase.
Recall that, according to the dynamics of futures on federal funds rates, it is expected that the Fed will raise the key interest rate by 0.50% to 1.00%. This probability is estimated at 99.3%.
In fact, observing everything that happens in the markets, we can say that such a scenario is already taken into account in the quotes of the value of assets, as well as the ratio of the dollar to other currencies in the Forex market. Now the focus is on the central bank's future plans, namely at what pace further rate hikes will occur.
Some believe that after tomorrow's 0.50% rise in June, the rate could be sharply increased by 0.75%, and then by the end of the year the rate of growth rates will drop sharply to 0.25%, which will allow the Fed to raise the overall level of the key interest rate to 3.00%. Others believe that it faces an almost impossible task - to fight inflation, raise rates, but at the same time, having run between trickles, not to lead the country's economy into a deep recession.
In our opinion, the central bank, after increasing the rate by 0.50% to 1.00%, following the meeting, can either take a pause altogether, for example, do nothing in June, or make a symbolic increase by 0.25%. We believe that the central bank will act cautiously, carefully comparing the dynamics of inflation and economic growth. In addition, it will try not to shock the local financial market, which receives significant support on the wave of capital inflows from Europe and other geopolitically unstable regions.
It is possible that the market feels such a likely position of the Fed, which may be announced tomorrow Wednesday, which is expressed in a significant reduction in short positions, which led to a rollback upwards in the US stock market. As for the prospects for the dollar, this movement will fully depend on the Fed's decisions as a whole and on the content of Fed Chairman Jerome Powell's speech at the press conference. Any hint of a more subdued continuation of the rate hike cycle would weaken the dollar, which is noticeably overbought against major currencies from a technical standpoint.
Regarding the dollar's likely movement today and tomorrow before the Fed meeting, we note that it can still continue to grow, but only time and the Fed's position will tell what can happen tomorrow.
