Today will be announced at the Federal Open Market Committee (FOMC) meeting. The central bank, which made its first rate hike in March, is expected to continue raising today. Although the weighted expectation is 75 basis points, the probability of 100 basis points should also be taken into account.
The reason for this is that despite the limited reduction in core inflation caused by the drop in oil, core inflation and food inflation continued to rise. The expected increase in energy and food prices with the onset of winter will be the reason for the Federal Reserve to raise interest rates.
The interest rate will be raised by 75 basis points for the third time.
If the Fed raises rates by 75 basis points today, it will be the most aggressive rate in more than 30 years.
What will be taken into account in pricing?
Assuming a 75 basis point rate hike today, in addition, revisions to growth and inflation expectations and interest rate expectations in the coming months will contribute to rate setting.
Currently, the labor market in the US economy is enjoying good growth, but the continued increase in inflation will slow down this sector. For this reason, inflation expectations come to the fore. If the Fed keeps its inflation expectations elevated at this meeting, as inflation forecasts for 2023-2024 and 2025 are expected to be discussed for the first time, it means that it will continue to raise interest rates. Of course, rates will matter, and interest rate expectations in the 4%-4.5% range indicate that the Fed will maintain its hawkishness through March.
Another point to note at this meeting is how the Fed will handle growth. If you remember, European Central Bank President Lagarde said that they are ready to deal with even the worst case scenario, and they are prepared for all eventualities. It is very important to pay attention to how Powell will express what he expects in the near term for the US economy, which is technically in a recession, and whether he has elevated concerns as Lagarde stated.
While the situation in asset purchases was a major forecast at the ECB meeting, there was such focus on growth that the issue of asset purchases was almost forgotten. So Powell’s focus on growth at today’s FOMC meeting may have a positive effect.
Since we touched on the Federal Reserve and the US economy today, we need to assess inflation in the US. Although cost inflation contributes a large share to inflation in the United States, demand inflation is also high.
Although the tighter interest rate policy has been in place for more than 30 years, there is no significant impact on the real interest rate. Therefore, the diminishing effect of interest rates today – there is also significant monetary expansion – cannot be strong in the face of inflation, which is around 8%. So the Fed must remain hawkish.
As a result of this behavior in line with expectations, it may continue to rise. The DXY dollar index, which rose to 110.87 today, recently hit a new high after 20 years. I would like to reiterate that I expect to reach the target level 113 as long as the 108 level is maintained in the short term.
There is a quote around 0.98 per dollar, which is the weakest level in the last 20 years. I see 0.9650 as an important support for the pair. We may continue losses towards this support.
The euro against the dollar
Tomorrow’s MPC meeting is also important for the USD/TRY, because the rate cut policy that started in September was suspended this year, but in August despite inflation reaching 80%. The forecast for this month is that interest rates will be left unchanged or reduced by 50 basis points.
Frankly, keeping it steady in the face of this interest-inflation gap will obviously not support TL. On the other hand, higher levels in the exchange rate seem to have already been taken into account. Therefore, the interest rate cut should not come as a surprise. However, each opponent will put more pressure on the lira.
Worst case for the price of the dollar; Fed hawks in control today, dollar strengthening in global markets, Turkish central bank interest rate cut tomorrow. All these possibilities may cause the exchange rate to accelerate above 18.40. Technically, I am not analyzing the price of the dollar, because the price does not have healthy pricing. Pricing, which rises when there is no improvement, decouples from global pricing, and trading in a narrow range at unexpected times is not healthy.
So, I am not following a technical level, only we have the December 20th peak at 18.40 on average, although it varies on some platforms. That’s why I mentioned this level above.