US Dollar (USD) - Conotoxia: "A dovish hike in the US"

EM Index Inclusions and Exclusions: India Thrives, Egypt Faces Challenges

The US Federal Reserve decided yesterday to raise interest rates by 0.5 percentage points, from 0.25-0.5 percent to 0.75-1.00 percent. This was the first rate hike of this magnitude in 22 years. However, the markets did not react with panic, on the contrary.

The US Federal Reserve, raising the target federal funds rate in May 2022, has already made the second increase in this cycle. Previously, it decided to raise interest rates by 0.25 percentage points. Thus, in total, rates in the U.S. have already increased by 0.75 percentage points, which aims to combat soaring inflation. The central bank added that further increases would still be appropriate, but not by 75 bps. as some market participants had expected. Governor Powell hinted at 50 bps hikes at the next few meetings during the press conference. Thus, some market participants may have rejoiced at the fact that the Fed will not raise interest rates as sharply.

The Fed will begin reducing assets on its $9 trillion balance sheet starting June 1. The plan will start with a monthly withdrawal of $30 billion from Treasury securities and $17.5 billion from mortgage-backed securities for 3 months, and then increase to a total of $95 billion per month. Here again, the market received a bit of a gift in not reducing the balance sheet immediately by $95 billion.

On the economy, policymakers noted that Russia's invasion of Ukraine and related events are creating additional upward pressure on inflation and will likely weigh on economic activity. However, the Fed sees no reason to fear a recession. On the contrary, the US economy is strong enough that it no longer needs much support from loose monetary policy.

The dovish interest rate hike may have pleased investors. The session on Wall Street was in the green, with the S&P 500 having its best session since May 2020 and the Dow Jones since November 2020. The US dollar, on the other hand, seemed to weaken after the Fed decision as US bond yields fell. However, the sustainability of yesterday's move in the markets remains an open question. Is the stock market's correction over? Or can the bull market return? Has the US dollar reached its peak? Here opinions may be divided.

Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)

Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

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EM Index Inclusions and Exclusions: India Thrives, Egypt Faces Challenges

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