A ‘Humble’ US Fed in January meeting, likely to be ‘Nimble’ footed for the March interest rate hike

In the recent US Fed meeting policy decision, the central bank remained humble by not surprising the market. However, the Central Bank has signalled to remain Nimble towards an interest rate hike and QT or quantitative tightening.

By keeping the interest rates at a widely expected level of 0-0.25%, they assured that the first-rate hike is coming in the March meeting along with an end of bond tapering. The message from Fed chair- Jerome Powell was loud and clear.

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He implied “We're going to be guided by the data and we'll try to communicate as clearly as possible, moving steadily and transparently”. This confirmed zero-shock or shockproof hikes in 2022 as they will fully prepare the market in advance.

We spoke to Amit Pabari, who is Managing Director and founder of CR Forex, to decode the potential impact of US Fed rate hike on currency markets:

Despite this fact, the global markets experienced some tremors. All 3 the major US indices reversed their gains overnight and currently trading red in futures.

Asian markets tumbled as well by 1.5% to 2%, trading to their lowest in nearly 15 months on Thursday. European markets are also trading with a loss of 1%-1.50%.

In the bond market, a rising expectation of a hike in rates affected the short-term yields. The 2-year yields jumped to a 23-month high above 1.17% and 10-year yields near 1.84%, taking the curve (10-2-year differential) to just 67 bps.

In the FX segment, the US dollar index - a primary gauge of dollar value against six major currencies rose to the highest level since the 15 December Fed meeting.

Euro Fell to 1.1220 and Pound at lowest levels since late December. Emerging Markets' FX too fell by 0.50%.  It seems that 2022 will be a year of higher volatility. The CBOE Volatility Index or VIX closed at 31.96, its highest level in a year.

Guidance on future market ahead of 4 to 5 rate hikes:

As long as the job market and growth are on the track and rate hikes are not impacting the same, the Fed will remain on a hawkish to very hawkish tone in every meet in 2022.

The balance sheet reduction is surely on the table this year and hence could keep the yields on track to rise further higher. After discounting 4 rate hikes fully post December Fed meeting minutes- released in the first week of this month, now the market has started discounting the 5th one.

The equity markets are finally discounting with the higher rates and valuation seems to revert at the mean level.

Moving ahead, the EM where flows were steadily going to the riskier equities and bond since last 2 years could be withdrawn soon and shift towards the safer asset like- US treasuries or may be into US equities. So, there would be higher chances of recovery in the US market, but not for the emerging markets.

The way US DXY (Dollar Index) has regained its stance after posting losses in early January confirms that the Index is heading towards 98.50 in the near term and 100 over the medium term.

The replica move can be seen into Euro and Pound and could towards 1.07 and 1.30 over the medium term. The EM FX will also feel the heat from stronger USD, but rescue operations could begin from the respective central bankers, depending on their FX reserves kitty.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)