FX.co ★ Fed sees risk from higher interest rates, but will hardly alter its plans

During the recent week, traders have been discussing the key interest rate hikes in the EU, the US, and the UK. Although most economists foresee a recession in the above-mentioned countries, I haven't noticed any signs of it. The recent GDP reports from the eurozone were quite positive. The UK reported an insignificant rise, but it is still a rise and not a decline. Meanwhile, in the US, the GDP was falling during two quarters, but the recent growth offset all the previous drops. Thus, at the moment, the key interest rate hike is not having a strong influence on inflation and economic growth. In the UK, inflation continues surging and has already exceeded 10%. In the eurozone, inflation advanced to 10.7% and only in the US, it has been falling for three months in a row. However, it is still above 8%. Thus, the Fed's key interest rate has been already hiked by 4%, whereas inflation dropped by only 1%. That is why in the EU and the UK, where the interest rates are significantly lower, inflation continues rising. Against the backdrop, a recession will hardly take place in the near future. The interest rates should be hiked much higher to start affecting economies. In other words, in the EU and the UK, interest rates are neutral.

A decline in the UK and the EU economies could be predicted based on the US economy. The fact is that the US was the first country that started rising the benchmark rate. That is why its economy will be the first to react to the change. As we see, even a rise to 4% has no considerable influence on economic growth. What is more, a recession is unlikely to affect the euro/dollar pair and the pound/dollar pair since it will start in three countries simultaneously. In this light, the market will hardly price in the economic contraction in the US and the EU. I suppose that only key interest rates will shape the market sentiment.

In the UK and the European Union, the key interest rates have room to rise. However, analysts doubt that the BoE and the ECB will keep up with the Fed and go on rising the benchmark rate until inflation drops to 2%. There are a lot of economic problems in these countries. No one can predict what difficulties these countries will face in the upcoming winter if demand for gas, energy, and heating soars. November is not even a winter month. That is why counties will face a lack of gas since Russia has almost stopped supplies. Although gas storages are full, this could not be enough to provide people with heating during the whole winter period. In addition, energy prices have skyrocketed and most households cannot afford such spending. As a result, we will see a decline in consumption, production, and investments. It will be time to evaluate the real state of affairs in various economic sectors.

Judging by the analysis, I can say that the asset started the formation of the upward section of the trend. However, it will hardly last long. At the moment, the instrument could form a new impulsive wave. That is why traders may go long with the target near 1.0361, the 261.8% Fibonacci level. The MACD indicator should be headed upwards. However, traders should remember that the formation of the upward section may end at any time.