Fed Raises Interest Rates; Dollar Weakens & Wall Street Rises

By: Miguel A. Rodriguez

09:54, 02 February 2023

Fed Fund rate

The dollar weakened, causing EUR/USD to reach its highest value since April 2022. Wall Street indices also rose significantly, with the TECH100 increasing by 3%. 

Jerome Powell's comments were more dovish than expected. The Federal Reserve raised interest rates by 25 basis points, as expected, and the statement issued along with the decision was not significantly different from the previous meeting in December. 

Following the announcement, the markets had an uncertain response, leading to minor declines in market indices and an increase in US Dollar purchases as investors moved to take profits from any gains made prior to the Federal Reserve meeting. No one was surprised as the market behaved as expected: "buy on the rumor and sell on the news". 

However, the market was greatly impacted by the statements made by the Federal Reserve chairman at the press conference. Powell acknowledged that the disinflationary process has already begun by making very optimistic comments about inflation's future. He stated that the global economic scenario had improved significantly, albeit with uncertainties, and that the latest data on the CPI, personal consumption expenditure, and employment costs show a clear downward trend, leading them to predict that the inflation target will be met without the economy deteriorates further.  

In fact, he admitted that no recession is expected. He even went so far as to say that they had tools to use in case of a rapid drop in inflation. This meant that future interest rate cuts were not impossible if the situation necessitated it.  

In reference to potential future hikes in interest rates, he indicated that they will proceed with the rises at the upcoming meetings, implying that it may take two before coming to a halt. This would bring the federal funds rate to between 5.00-5.25%, which is what the market had anticipated. 

Investors and traders will be paying close attention to the Consumer Price Index and employment numbers until the next meeting. Markets will be focused on tomorrow's release of non-farm payrolls data, expecting it to provide insight into economic events

The market reacted immediately to these comments. US Treasury yields fell by approximately 10 basis points across all benchmarks. 

The dollar weakened against all currencies, pushing EUR/USD above 1.1000 for the first time since April 2022. Wall Street indices soared, with the Nasdaq technology index (TECH100) gaining more than 3%, the most sensitive to interest rates. 

Related: EUR/USD analysis and price predictions 

Sources: Bloomberg, Reuters 

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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.