The question on everyone’s lips is when is the US Federal Reserve going to raise rates to combat inflation? With US real average hourly earnings falling, food inflation spiking and the Great Resignation rolling ahead, it may sooner rather than later. Interest rate futures are putting it at June next year, with the tapering and conclusion of the asset purchase program slightly later, but the problem of Omicron and persistently high inflation may shuffle those intentions around. This weeks FOMC meeting may provide an answer and some certainty for risk markets going into the end of the calendar year, particularly for the bullish case for USD if the tapering quickens.
First look at the current inflation rate, with Friday’s print certainly sending eyebrows raising:
This is the highest rate since early 1982, and harkens back to the stagflation period of the 1970’s (although this cycle is much much different):
Average hourly earnings are not keeping pace, with the latest reading at only 4.8%:
This is likely to force the Fed’s hand, with the Fed Dot Plot anticipating at least two or three interest rate hikes next year, while also signaling an acceleration of the current tapering process:
Federal Reserve Dot Plot September 2021
This should translate into a higher USD, as measured by the US Dollar Index (DXY) or against the major currency pairs. The technical medium and long term charts are pointing to a return to the 2020 highs, after pushing through the 2019 resistance level at 96 points, with weekly momentum solidly overbought, although price is bunching up here:
This is mainly due to a possible bottom in Euro, which has been in near terminal decline since putting in a double top pattern at the start of the year:
However, the mid-year forecast for the first rate hikes would then equate to a return to the 2019 bottom for Euro at the 1.08 handle:
Tomorrow’s night FOMC meeting will raise volatility across the board – which means opportunity!