The topic of the upcoming increase in the Fed's interest rates does not leave the market and continues to have a noticeable impact on the mood of investors.
The stock market in the United States remains dominated by expectations of a rise in the cost of borrowing, which negatively affects the shares of technology companies, as well as companies with significant financial debts that appeared during the acute phase of the coronavirus pandemic. Traditionally, rising interest rates negatively affect the dynamics of the stock market, but not all stocks. In these conditions, securities of companies in the banking sector receive good support, since the increase in interest rates has a beneficial effect on the attractiveness of bank deposits and, accordingly, on the income of these financial organizations.
In addition, the expectation of an increase in rates supports a sell-off in the US government debt market, which leads to an increase in the yield of treasuries, and this stimulates demand for the US dollar, which is accompanied by an increase in its exchange rate.
Today, the market's attention will be drawn to the publication of important economic data in America – the preliminary value of GDP for the 3rd quarter, the figures of the basic index of personal consumption expenditures, and initial applications for unemployment benefits for the past week.
Let's start with the GDP forecast. It is assumed that its growth for the 3rd quarter will be 2.2% against 2.0%. If the values turn out to be no worse than expected, this may support positive sentiment in the markets. The indicator of the basic index of personal consumption expenditures is an important component of US inflation, so its growth has a beneficial effect on the dollar. According to the forecast, the indicator should grow by 4.1% in annual terms against 3.6%, and in monthly terms, it should add 0.4% in October against 0.2% in September.
If the data turns out to be higher than expected, it will only increase the likelihood of an earlier rate hike in the US and negatively affect the local stock market. The values of initial applications for unemployment benefits for the past week may also have a negative impact. It is assumed that they will come out at the level of 260,000 against 268,000 a week earlier. If the number of applications is higher, it will be negatively assessed by the markets.
The final topic today will be the publication of the minutes of the last Fed meeting on monetary policy. Investors will study it carefully, trying to find out the possible real timing of the start of the interest rate increase, as well as its pace. Any hints of a more aggressive rate hike process will have a negative impact on stock markets and will support the dollar exchange rate.
To sum everything up, we believe that increased inflationary pressure in America will stimulate the growth of the US dollar and at the same time, put pressure on stock indices. We expect such general trends to continue until the end of this year until new inflation data are announced.
Forecast of the day:
The EUR/USD pair is consolidating in anticipation of the publication of US statistics and the minutes of the last Fed meeting. Our forecast for the pair remains the same. Its decline below the level of 1.1230 may lead to its further fall first to 1.1175, and then to 1.1100.
The NZD/USD pair is trading above the level of 0.6900. The decision of the RBNZ not to change the monetary rate after the meeting, as well as possibly positive statistics for the US dollar and the content of the minutes of the last Fed meeting, may lead to the further fall of the pair to the level of 0.6850.