How the FOMC meeting can influence both the dollar and stock market?Posted on Wednesday, September 26 2018 at 3:34 pm GMT+0000
Today all eyes will be on the Fed meeting and the meeting minutes, as well as the Fed Chairman’s press conference. An interest rate hike today had been approximately fully priced (markets assigning more than 94% probability for such restraint), but what does really weight today is the Fed’s expectations for the inflation, growth and the monetary policy path for the next couple of years.
Although equity markets are extremely indifferent from any economic changes, a hawkish Fed could prove negative for equities. It is expected that the interest rate will rise to 2.5% by the end of this year. Currently, bond yields have exceeded 3%. With interest rates reaching 2.5%, we will witness further increase in bond yields. This will provide alternative investment options for investors. It should not be forgotten that the underlying motive behind the overvaluation of equities was and is still caused by the lack of alternative investment options, but with returns of 3.5% bonds market will attract many investors, especially the more conservative ones.
As I mentioned, a quarter-point rate increase is seen as a done-deal, and another hike is large part priced in December, so there is no new motive to support a new rise of the dollar. In addition to that, let’s not forget the weakening economic data recently.
What could restore the dollar’s bullish momentum, is a positive inflation and growth outlook and a hawkish Fed relative to market expectations.
Technically, the dollar index has completed a Bearish reversal pattern and is expected to reach 92.00, only a Fed’s hawkish tone can support the dollar back.