The forex market witnessed a great shock yesterday following the extremely aggressive action of the US Federal Reserve in hiking its interest rate by 75 basis points marking the highest rate in twenty-eight years. This drastic measure became inevitable after the initial interest rate hike in May by 50 basis points had failed to cut down the inflation counts.
The consumer price index report for the just concluded month given last Friday shows a clear testimony of increasing inflation since May. The CPI came very high at 1% marking a 0.7% increase from the last data recorded at 0.3%.
Similarly, the core CPI, excluding food and energy prices, was stable at 0.6%. This means inflation focused on the most desired products: food and energy.
Another factor that testified to an increasing inflation rate was the retail sales data released yesterday. The retail sales report, which measures the number of goods and services purchased by consumers, has always been a subtle way of calculating the inflation rate. This time the Retail Sales report was the worst in six months given at -0.3%, which is a massive decline from the previous record of 0.7% and far from the forecast of 0.1%.
The above data from the retail sales report suggests that consumers couldn't buy much from retailers due to high prices due to increased inflation.
Consequently, during the Fed Economic Projections session, the Fed reserve was forced to hike its interest rate by 75 basis points yesterday, marking the highest rate increase since 1994.
What impact will the recent interest rate hike have on the market?
The recent interest rate hike will significantly impact the forex market, especially on FX, Crypto, Stocks, and Commodities.
Primarily, the interest rate hike will further strengthen the dollar index. This means we expect the DXY to break above the current resistance at 105.3 to a new all-time high above it.
Next, increasing dollar strength will discount all pairs pegged to the US dollar, including Gold, Silver, Bitcoin, Ethereum, and other cryptocurrencies.
At the moment, investors will refrain from risky assets and buy massively into the treasury yields. This will bring down the prices of most stocks until investors absorb the shock.
Finally, all currency pairs matched with the US dollar as the base currency will turn bullish for the moment. In contrast, those having the US dollar as the counter currency will fall massively. For instance, pairs such as EURUSD will likely experience more decline. In comparison, USDCAD, USDJPY, etc., will share more upsides.
Traders are advised to use a proper risk management strategy as significant volatility will definitely set into the market until the end of the month.