It seems that high volatility could be seen only in the stock market. What is more, the satiation in both stock and currency markets is very uncertain. Yesterday, the currency market showed a dynamic that could be explained by the expectations of the 0.50% hike by the Fed instead of 0.75%.
Why are traders of the stock market so nervous?
On the one hand, the situation could be explained by concerns that the Fed will slacken the pace of the interest rates growth. However, it may raise it during the next year amid high inflation. This scenario is really possible if inflation stops falling. In this case, the US economy will face stagflation, a phenomenon that has been widely discussed this year. It means that the US will suffer high inflation and an economic downturn, caused by high interest rates.
Such a risk frightens investors in stocks. They suppose after the New Year, the US economy will see massive layoffs. This, in turn, will negatively affect the labor market condition amid high inflation and stagflation. However, it is still very difficult to make an accurate forecast.
How long may last the current situation in the market?
It is quite possible that the market situation will remain unchanged until December 13, when inflation figures for November will be disclosed. This inflation report is likely to determine the Fed's policy. If inflation declines, markets will show a positive reaction, whereas the US regulator will get a strong reason to raise the benchmark rate by 0.50%. The Fed may also announce that at the next few meetings, the pace will become even lower. Against the backdrop, demand for stocks may jump, whereas the greenback may significantly lose in value. In this case, the Santa Clause rally will be launched.
However, there is a negative scenario that presupposes a jump in inflation. In the event of this, demand for stocks will slump, whereas the US dollar and the yield of US treasuries will rise. The fact is that the Fed may consider higher interest rates and a longer period of their hike.
Outlook:
GBP/USD
The pair is likely to trade within the range of 1.2095-1.2340 amid the expectations of the US inflation figures and the Fed's meeting.
AUD/USD
The pair continues hovering within the range of 0.6665-0.6800 amid expectations of the US inflation figures and the Fed's meeting. It is highly likely to remain in this range.