Will 2015 End With a Fed Rate Hike?
Every week there are a number of potential market-moving events. But make no mistake; there is no other event, this week or any, that could compare to Wednesday’s market mover. For that is when the Federal Reserve Bank announces its final monetary policy decision of the year.
In truth, over the past year, the Fed has hit our radar at least once a month, in some context or other. Perhaps it’s the chairman’s speech, or the release of the meeting minutes or an updated Beige Book. But this, truly, is the event that the world’s markets have all been anxiously awaiting. A rate hike would be viewed as a landmark event and an indication that the 2008 financial crisis is finally over. It also signals that the US Dollar is destined to maintain its strength for a long time.
Rate Hike Would Propel Dollar
For the first time in nine years the Fed is on the verge of raising interest rates. A dozen individuals who make up the Federal Open Market Committee hold the world’s fate in their hands. Expectations are high that we will see at least a nominal increase in the benchmark rate. Given that it has taken nine long years, a rate increase will have an immediate and strong impact. The Dollar will rally versus its peers, meaning the EUR/USD could finally hit parity or even fall below.
Commodities and Equities Could Take a Hit
Now, with a rate hike, Gold and Oil could come under heavy pressure given improved appetite for the Dollar. That would be in addition to the pressure generated by dwindling demand for precious metals and oil. On the equities side of the equation, the knee-jerk reaction on Wall Street might be negative. However, that disappointment will likely be short-lived. Equities would eventually recover and continue to rally amid the underlying strength of the US economy.
Or Is the Fed Cooking a Bitter Surprise?
Though analysts generally do expect to see the Fed raise rates at this week’s policy meeting, one never knows. A great many factors will go into the Fed’s decision making process. Those factors include economic data from the US (generally positive) and global growth (generally not very positive). A too strong Dollar could negatively impact trade and ultimately might not have the desired outcome. On the other hand, Janet Yellen, the Fed’s chairman, has relentlessly promised a rate hike this year. So this meeting is her last chance to make good on that promise so that she doesn’t lose face.
Now, the Fed has surprised in the past, generally to the great disappointment of Dollar bulls. If the Fed does not raise rates, the Dollar could lose ground amid that disappointment. Meanwhile, the relief rally that would be ignited in equities and Gold would come alongside that of the Dollar’s peers, namely the Euro and Sterling.
Down to Business
It all boils down to this: If the Fed does raise interest rates, the Dollar would rally broadly while equities could take a preliminary hit. If the Fed surprises, the Dollar would come under broad pressure while Wall Street bulls would heave a giant sigh of relief. Though most bets are calling for a rate hike on Wednesday, there remains a tiny bit of uncertainty. Like the rest of the world, we’ll be anxiously awaiting the momentous decision.
On the Plate
RBA Meeting Minutes(Tuesday)- If the RBA Minutes reveal an upbeat RBA then the Aussie could gain vs the Yen and the Euro.
UK Core CPI(Tuesday)- If the UK’s core CPI nudges higher it could soften selling pressure on the Sterling.
US Core CPI(Tuesday)- If US Core CPI(Inflation excluding food and energy prices) moves to 2% YoY or above it will increase the chances of a Fed rate hike on Wednesday and push the dollar higher.
Eurozone Core CPI(Wednesday)- If Eurozone Core CPI (Inflation excluding good and energy) falls below 0.9% YoY once more , the Euro could be hit.
UK ILO Unemployment(Wednesday)- If unemployment in the UK falls below 5.3% it could as would the CPI , ease selling pressure but let there be no mistake the Fed rate decision will be the wild card for all pairs.
Fed Rate Decision(Wednesday)- The most important rate decision of the year and definitely the most important economic event for the week. If the Fed raises rates for the first time in more than 9 years the Dollar will really across the board and the EURUSD might fall below 1.
BoJ Rate Decision(Friday)- If the Bank of Japan holds ground and remains slightly upbeat, the Yen could gain vs weaker peers such as the Euro or the Sterling.
Chart of the week:
Real Time Economic Calendar provided by Investing.com.