The expected Fed rate hike is still a hot topic in the market, and it continues to affect investor sentiment.
The US stock market is still dominated by rising borrowing costs, which hurts technology businesses and companies with large debts incurred during the coronavirus pandemic. Historically, rising interest rates have harmed the stock market, but not all stocks. In these circumstances, bank stock securities do well since rising interest rates boost the appeal of bank deposits and thus the income of these financial institutions.
The prospect of higher rates also encourages selling of US government debt, which raises the yield on US Treasury bonds, and so increases demand for the US dollar, which in turn raises its exchange rate.
Today, the market will focus on crucial economic data from America – the preliminary 3rd quarter GDP, the fundamental index of personal consumption expenditures, and initial unemployment benefit claims for the last week.
First, the GDP prediction. The 3rd quarter growth is expected to be 2.2% vs 2.0%. If the levels are as expected, this may help boost market mood. The basic index of personal consumption expenditures is a key component of US inflation, hence its rise benefits the dollar. Annually, the indicator should rise 4.1 percent versus 3.6 percent, and monthly, it should rise 0.4 percent versus 0.2 percent.
Unexpectedly high data increases the chances of an earlier US rate hike and hurts the local stock market. Initial claims for unemployment benefits may also have a detrimental influence. They are expected to be 260,000, down from 268,000 a week ago. Markets will be adversely affected if the number of applications increases.
The minutes of the latest Fed meeting on monetary policy will be published today. Investors will closely examine it to determine the timing and speed of future interest rate increases. Any indication of a faster rate hike process will hurt stock markets and boost the dollar.
To summarise, we expect that rising US inflation will strengthen the currency while weakening stock indexes. We expect these broad patterns to continue through the end of the year.
Today’s forecast:
The EUR/USD is stabilising ahead of US data and the minutes of the latest Fed meeting. Our pair outlook remains unchanged. If it falls below 1.1230, it may fall to 1.1175, then to 1.1100.
The NZD/USD is trading over 0.6900. The RBNZ’s decision not to change the monetary rate following the meeting, as well as possible favourable dollar statistics and the minutes of the latest Fed meeting, may cause the pair to fall to 0.6850.