The US Federal Reserve on Wednesday increased the interest rates by 75-basis points, which is in line with the market expectation. The Fed fund rate now stands at 3-3.25 per cent. The economic projections indicate that the aggressive rate hikes will continue for the rest of the year in spite of the growth now being projected to slow down sharply.
The US Dollar index has surged breaking above the key level of 110 after the Fed meeting outcome.
The index made a high of 111.78 and has come-off slightly. It is currently at 111.56. The much stronger US dollar has dragged the Indian rupee sharply below the psychological 80-mark. The rupee has made a new low of 80.74 so far and is currently trading at 80.69.
More hikes coming
The dot plot projection released on Wednesday indicates that the Fed fund rate (median projection) is likely to be at 4.4 per cent by the end of 2022 and 4.6 per cent in 2023.
This means that another 125-bps hike to come from the Fed in its next two meetings.
Will it be a 75-50 bps (November-December) or a 100-25 bps? The data that will be released in the coming days will give a cue on it.
As of now, it could more likely be another 75-bps in November and 50-bps in December unless the US inflation shows a strong uptick in September and October. The next Fed meeting outcomes will be on November 2 and December 14, 2022. There is no meeting scheduled for October.
The next year (2023), however, is expected to see just a 25-bps rate hike as per the median projection released.
It is to be noted that the median projection is based on the current situation. There could be changes in it as things evolve going forward.
The growth in the US is projected to slow down sharply this year.
The central bank forecasts the US economy to grow at a rate of just 0.2 per cent in 2022.
This is sharply lower against the 1.7 per cent growth projected by the Fed in June this year.
Powell is very clear that the ultimate goal of the Fed will be to bring down inflation to their target two per cent level.
“People are suffering from high inflation. It would be nice if there is an easier way to bring the inflation down without causing pain. But there isn’t,” said the Fed chief in a press conference.
Slowdown in the economy and increase in unemployment rate are the pain points as inferred from Powell’s speech.
The US unemployment is projected to increase to 4.4 per cent next year from 3.8 per cent this year. The unemployment rate in the US is currently at 3.7 per cent.
US Market reaction and outlook
The US dollar strengthened as the Treasury yields surged at the near-end (2- and 5-year) and equities tumbled.
The US dollar index (111.56) has risen sharply breaking above the key level of 110. The overall picture is bullish. The index can test 112 and 114 in the coming weeks. Important to note is that 114 is a strong resistance for the dollar index. The current rally can halt at 114 and see a reversal.
The Dow Jones Industrial Average (30,183.78, down 1.7 per cent) has key supports coming up in the 30,000-29,500 region. A bounce from the 30,000-29,500 support zone is more likely. But it will have to be seen if that bounce is sustaining well or not. This is because the charts indicate that there could be room for the Dow to tumble towards 28,500 before bottoming out.
The Indian Rupee (80.69) has declined to a new low of 80.74 following the sharp rise in the dollar. The rupee is now vulnerable to test 81-81.20 in the coming weeks.
The Indian benchmarks are relatively resilient compared to the global peers.
At the time of filing this report, Nifty 50 (17,582) and Sensex (59,022) are down over 0.7 per cent each.
Despite a further fall from the current levels, the pace of fall could be slow.
Nifty has strong supports at 17,400-17,350 and then at 17,150. Broadly, we can look for wide range of 17,150-18,100 on the Nifty for a few weeks and then a fresh breakout above 18,100 going forward.
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