Federal Reserve Building, Washington DC, USA. Image source: Tananuphong Kummaru © 123RF.com
The Federal Open Market Committee of the FED is gathering this Wednesday in what many market experts consider to be a crucially important vote on the underlying interest rate in the US.
Presently, the rate is held at 1.75 per cent, and the consensus forecasts project no likely changes at the current time. However, the market would be looking for evidence in the post-decision monetary policy statement signalling possible future hikes.
Many commentators start to fear that the low interest rates worldwide, could also be fuelling another debt bubble, and could even ignite a new recession.
Therefore, any inklings in FOMC’s statement on Wednesday that are suggestive of a likely stabilisation of the economy allowing for future hikes in the rate to or above 2 per cent are going to be welcomed with great optimism by the market.
At the current time, however, the situation predisposes for no changes to the rate and the continuation of FED’s accommodative monetary policy.
Inflation reached 2.3 per cent in the previous month, which is the highest level on record since October 2018 and in line with the general consensus. The Consumer Price Index has thus exceeded FED’s 2 per cent target level.
The surge in the inflation rate is owing to the stabilisation in the commercial relations between the US and China and the signing of Phase One in the trade negotiations between the two countries.
If the situation were different, inflation of 2.3 per cent alone would be compelling enough even to prompt an increase in the interest rate, which would negate the possibility of overheating the economy.
US Inflation Rate. Image source: TradingEconomics.com
However, following the outbreak of the deadly coronavirus in China and the renewed uncertainty sweeping through the markets, inflation is likely to suffer from a possible deterioration in the consumer sentiment.
The market sentiment is currently suffering from the increasing fear stemming from the outbreak of the pandemic. Thus the FED might have to extend its protective and accommodative monetary policy stance in order to use it as an insurance against the heightened uncertainty.
In contrast, the robust performance of the labour market is the saving grace of the US economy at the current time, as the unemployment rate remained historically low at 3.5 per cent for the second consecutive period.
Overall, the dollar is likely to be hit from the new uncertainty stemming from the coronavirus’s outbreak and the decision to keep the interest rate at 1.75 per cent for the time being would most likely propel the greenback in a temporary selloff.
Meanwhile, the USDCAD failed to break out above the 61.8 per cent Fibonacci retracement level, which is yet another bearish indication.
USDCAD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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