A 0.50% rate increase by the Fed was not a surprise to markets because many already anticipated this for a long time. However, the revised economic forecast was quite striking as the change was more significant than expected.
In the September forecast, the average level of interest rates next year was assumed to be 4.6%. This means that the rate should be between 4.50% and 4.75% by the end of the year. But yesterday, the Fed raised the rate to 5.1%, so the average should be somewhere between 5.00% and 5.25% by the end of 2023. This suggests that there will be no decrease of rates next year, which is completely different to what markets wanted. This is also likely to make the average interest rate to be slightly higher in 2024 and 2025.
Interest rate (United States):
Logically, the decision should have pushed dollar up, but markets are still waiting for the moves of the European Central Bank and the Bank of England. Both will hold their own sessions today, and the latter is expected to raise interest rates from 3.0% to 3.5%.
Interest rate (UK):
For the European Central Bank, the interest rate will probably be increased from 2.0% to 2.5%.
Interest rate (Europe):
Such an increase will have no effect because in light of the revision of the Fed, only subsequent statements are of interest. The revision of the Fed changed the situation, so only similar statements from the ECB will prompt strong movements in the market.
But the two central banks operate in different conditions, in which the US have signs of overheated labor market, which can only be countered by high interest rates. The European Union, on the other hand, has high unemployment rate, and raising rates further could lead to higher unemployment. This limits the room for manoeuvre, so the ECB is likely to be the first to lower interest rates.
Looking at the forex market, EUR/USD continued to renew the local high, coming close to 1.0700. However, it bounced back, most likely because of the speculative frenzy in the market. This suggests that new price jumps may occur, so in order to prolong the upward cycle, traders must keep the pair above 1.0700 as dropping below 1.0600 will trigger a downtrend.
As for the GBP/USD, there are prerequisites for an accumulation of trading forces, which is characteristic for new speculative price surges. The next move will occur after the amplitude is completed.