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FED: a more hawkish monetary policy to be expected

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Miguel A. Rodriguez
Miguel A. Rodriguez
05 November 2022
The minutes of the last Federal Reserve meeting published on Wednesday did nothing more than confirm the hawkish turn of the North American central bank.

The market anticipates a 50bps increase in May. There’s more than an 80% probability for the increase to be the same as at the beginning of the Fed's balance sheet reduction program. The reduction is estimated to reach $90 billion monthly.

 

Even the most dovish FED officials support a radical change, as stated in their public interventions. The goal is to reduce inflation at all costs with interest rate increases that could push the FED funds rate above the 2% level in 2022. This is the minimum the market is beginning to discount, considering that the US 10-year bond yield has already reached 2.66%. It could continue up to 3% if the Federal Reserve decides to sell bonds from its balance sheet following their May meeting.

 

In the foreign exchange market, this reflects in the strength of the US Dollar, which benefits from the highest interest rates, especially against the Japanese Yen, which is already approaching the high of 124.50. If exceeded, it will not find any major resistance until the 135 area.

 

In addition to the conflict in Ukraine, stock indices are being negatively affected by this additional tightening of interest rates. The market is wondering how far these corrections can go and how much current prices already include the expected increases in interest rates.

April is usually a positive month for the markets. Next week, the earnings season begins for the major North American companies, so a rebound from these levels could leave a more positive technical scenario.

 

Something that can lighten the weight of investors is the fall in Oil prices. 

 

To a large extent, inflation stems from higher energy prices, so a deeper drop in Oil prices could herald an improvement in inflation data. This would likely cool the FED's determination to tighten financing conditions drastically. Oil has dropped to major support at around $94.75/barrel, which, if broken, would pave the way to the mid-$80s area. 

 

The Nasdaq index has technically already experienced a downward correction that has taken it to the 38.2% Fibonacci retracement of the last leg up. It has bounced back strongly, so the 14,376 points level can be considered a reference one.

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Sources: Bloomberg.com, Reuters.com

This information/research prepared by Miguel A. Rodriguez does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views and consequently any person acting on it does so entirely at their own risk.The research provided does not constitute the views of KW Investments Ltd nor is it an invitation to invest with KW Investments Ltd. The research analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.The research analyst in not employed by KW Investments Ltd. You are encouraged to seek advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit that conforms to your specific investment objectives, financial situation, or particular financial needs before making a commitment to invest. The laws of the Republic of Seychelles shall govern any claim relating to or arising from the contents of the information/ research provided. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
Financial Writer

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.