All eyes are on the Fed’s incoming policy signals due later today, with US interest rates set to be raised to their highest levels since 2008.
With a 75bp hike already fully priced in, a dovish, smaller 50bp hike is likely to translate into strong dollar selling while offering some immediate relief for risk assets.
On the flip side, a gargantuan 100bp hike may inject fresh vigour into dollar bulls, while also dragging equities and gold prices even lower.
Market participants will also be looking beyond the size of today’s hike, ready to parse through the latest rates projections.
The Fed’s previous dot plot in June had earmarked a peak of 3.75% for the ongoing rate-hike cycle. Since then, after further evidence of stubbornly high inflation and sustained resilience in the US labour market, money markets are now expecting rates to peak around 4.5% in March.
Should the Fed steer markets into expecting larger salvos of incoming hikes, with rates perhaps moving beyond the 4.5% forecasted peak and staying elevated for longer, then we are likely to see another risk-off wave across global financial markets.
