Hawkish Fed! Strong Dollar! - What are the markets expecting?

he Fed has kept interest rates steady as expected, but Chairman Jerome Powell's statements were much more hawkish than anticipated.

In summary, 12 out of 19 Fed members are calling for one more interest rate hike this year. No interest rate cuts are expected this year. Inflation is expected to remain high over the next 12 months. Tightening and balance sheet reduction will continue. An increase in unemployment is expected for 2024. Even if there's no interest rate hike this month, there could be one more increase later in the year.

Key takeaways from the monetary policy meeting minutes and Powell's remarks:

The year-end interest rate expectation for 2023 has been raised to 5.6%, and the expected rate for 2024, initially at 4.6%, has been increased to 5.1%. Additionally, the expectation for 2025, previously at 3.4%, has been raised to 3.9%.

Long-term interest rates will remain high, with the long-term rate expectation at 2.5%.

Unemployment expectations:

3.8% for 2023
4.1% for 2024
There is a bias towards an increase in unemployment.
Core inflation expectations:

3.7% for 2023
2.6% for 2024
2.3% for 2025
2.0% for 2026
Expectations suggest a gradual decline rather than a rapid one.
With the release of the monetary policy minutes, 2-year U.S. Treasury yields have risen to 5.1%, which is particularly negative news for stocks and gold.

MARKET EXPECTATIONS:

Gold:
Initially, gold may continue to rise to the range of 1,960-1,963 as an immediate response. However, the continued high-interest environment will exert downward pressure on gold, and we may see a decline to around 1,880 levels after reaching 1,960.

U.S. Stock Indices:
Given the high-interest rates and high inflation, we shouldn't expect significant gains in the stock market. Currently, it's prudent to view every increase as a selling opportunity.

USD:
The strengthening of the dollar is expected to persist, especially against currencies of countries signaling relaxation in their monetary policies. The dollar is likely to maintain its strength for some time.

EUR:
The European Central Bank (ECB) took a dovish stance in its recent interest rate decision, reducing the possibility of further rate hikes. Although there has been a slight decrease in Eurozone inflation data, we may see a chart indicating USD dominance and a downward trend in the EUR/USD pair.

JPY:
Japan remains the only country with negative interest rates (-0.10%) and a commitment to a loose monetary policy, suggesting that the depreciation of the yen will continue.

GBP:
The Bank of England (BoE) decision and statements tomorrow will be crucial for the pound. However, our expectation is that tomorrow's announcements will resemble the Fed's hawkish stance, leading to some strengthening of the GBP. We will publish a new analysis after tomorrow's meeting to provide an update on the pound's situation.

Oil:
Today's U.S. crude oil inventory data came in below expectations, indicating that OPEC's production cuts are still in effect. We expect oil prices to reach $100 due to ongoing production cuts, which will negatively impact both stock markets and inflation for some time.