30.11.202123:08 Forex Analysis & Reviews: Powell is forcing events, the dollar's emotions are going wild. When to expect the Fed rate hike?

Exchange Rates 30.11.2021 analysis

Finally it happened! Federal Reserve Chairman Jerome Powell said what dollar bulls were eager to hear. Some analysts call his comments unexpected and "surprisingly hawkish".

It seems that Omicron forced Powell to reconsider his stubborn attitude towards inflation and forced him to take measures to tame price increases before it was too late. Against the background of a strong economy and expectations, inflation growth will continue until the middle of next year. To these remarks, Powell added the economic risks associated with the emergence of a new strain of the virus, potentially more dangerous.

A number of Fed officials have previously advocated for the central bank to accelerate the pace of reducing the stimulus program. Ideally, this process should be completely completed "sometime in the spring." Next – an increase in rates. Judging by the text of Tuesday's speech, Powell is now in full solidarity with his fellow hawks. By the way, he refused to use the word "rolling" in relation to inflation. Now the head of the US central bank considers such a definition incorrect in the current conditions of dangerously high inflation.

The US central bank intends to accelerate the process of curtailing bond purchases at the next meeting, that is, in December.

"At the moment, the economy is very strong and inflationary pressures are high, and therefore, in my opinion, it is advisable to consider reducing our asset purchases, which we actually announced at the November meeting, perhaps a few months earlier, and I expect that we will discuss this at our upcoming meeting in a couple of weeks," Powell explained.

If the Fed decides to reduce purchases by $30 billion per month, the program will be completed in March. In this scenario, the chances of a rate increase in the first half of 2022 increase.

Powell's hawkish comments prompted markets to reconsider the expected timing of the start of policy tightening. An increase in the federal funds rate in July 2022 was again predicted with 100% probability, whereas the day before the estimate was at 58%. June also appears with a good percentage component - 80%.

News from the United States revived the dollar, which in an instant won back the day's losses.

Exchange Rates 30.11.2021 analysis

Omicron Risks

Although the time with Omicron is not comparable to what it was at the height of the pandemic in the spring of 2020, nervousness among officials and financial markets is present, and not small.

Investors are concerned about reports from pharmaceutical companies that coronavirus vaccines will not be as effective against the new strain. The US president tried to calm the population the day before, assuring that the American authorities, together with vaccine manufacturers, are developing plans to combat the mutant from South Africa. Omicron is "not a reason to panic." Is this so and do the authors themselves believe in these words?

The degree of tension will increase if the authorities of the world's largest economies talk about lockdowns. Already, investors are showing their fear about the near-term prospects of the global economy, which is reflected in the growing demand for protective assets such as the yen, franc, and gold.

Meanwhile, the now dominant delta strain dealt a blow to the American economy in the summer, slowing down and exacerbating supply chain problems that led to an increase in inflation.

No one knows what surprises Omicron is preparing. Some of the answers should be in two weeks, the other in a month.

"Then and only then will we be able to assess how this will affect the economy. At the moment it's a baseline risk, it doesn't really fit into our forecast," Powell said.

Nevertheless, he admitted that it increases uncertainty about the prospects for the economy and potentially increases the risks of inflation.

Natalya Andreeva,
Pakar analisis InstaForex
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