Weekly Market Outlook

Weekly Market Outlook: Fed, RBA and BoE Hike Rates as Inflation Reach Multi-Decade High

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Weekly Market Outlook This week is packed with central bank meetings and high-impact data releases. RBA will kick off the week with an expected 15 bp rate hike. Similar moves are expected from the Federal Reserve and Bank of England later this week. The US rate hike will be the top event for the week, as a 50 bp is fully priced in with more moves to come before the year end.

Fed Set to Go Big and Fast

The Federal Reserve meets this week and it has widely signaled a 50bps rate hike, which would be the first such a move since 2000 and to confirm plans to begin shrinking its $9 trillion asset holdings by $95 billion a month starting in June. Surging inflation has forced the Fed into action and markets are pricing in nearly 9 interest rate hikes this year. Investors will be watching for clues on the rate hike expected path to curb price pressures that are at a four-decade high.

A 50 bp hike is now a certain move as Fed funds futures market is pricing by 99.6% a 50 bp hike in this week’s meeting, according to the FedWatch Tool. Not only at this meeting, but also at the following meetings until September. The Federal Reserve is also anticipated to announce reduction of the balance sheet.

Weekly Market Outlook - US Fed Rate Hike

With an overheating economy, booming labor market and accelerating inflationary pressures, nothing appears to hinder the Federal Reserve’s upcoming decision to raise rates again this week. The Fed is expected to hike rates half a point after concluding its two-day meeting on Wednesday. 

Headline inflation rate accelerated to 8.5% in March, the highest since 1981. Energy was the biggest contributor and is expected to remain so given the recent spikes. Core inflation, excluding energy and food volatile prices, also spiked to its highest in 40 years. Inflation was seen peaking in March, but given the strong demand, supply constraints and geopolitical tensions, inflation will likely remain elevated for longer than previously anticipated. The US economy expanded by 3.4% in the first quarter of 2022.

On the economic front, April’s non-farm payroll report is scheduled on Friday and early estimates show a 390k job gain. Subject to revision, job growth averaged 562k in Q1. Meanwhile, the unemployment rate is seen falling further to 3.5%.  

The move is already priced in, leaving the main driver for the USD how hawkish the statement and the brighter the outlook will be. The DXY is trading near its highest since May 2020 and the USD forecast remains optimistic for the year. 

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It’s Time for RBA to Join the Tightening Cycle

the Reserve Bank of Australia will likely increase interest rates by 25 basis points on Tuesday. The move was almost confirmed after first-quarter inflation rate hit a two-decade high of 5.1% while the labor market remained historically tight. RBA’s forward guidance will catch the attention, and is expected to sound hawkish with interest rate seen at 1.25% by the end of 2022.

Weekly Market Outlook - AUD CPI

The RBA has been keeping low rates for three main reasons; emerging uncertainties from the Ukrainian crisis, subdued wage growth and finally that headline inflation remains lower than other countries and forecasts of the core dropping to 2.75% in 2023 as supply-side issues gradually fade. But the RBA has reached the point where inflation and wages are set to move higher over the medium term. Rising wages in the coming months will have the greater impact on the central bank’s policy course throughout the year.

The BoE Heads for a Fourth Rate Hike in a Row

The Bank of England is expected to hike interest rates for the fourth meeting in a row by 25bps to 1% as inflation hit a 30-year high. The move comes as the bank’s officials are more concerned about the growth outlook as cost-of-living pressures mount. At its March meeting, the BoE had a dovish 25bps hike, with an 8-1 vote split.

The drastic surge in inflation rates is pushing the bank towards a fourth rate hike in a row bringing interest rates in the UK to its pre-pandemic levels. Multiple rate hikes are anticipated before year end to tame inflationary pressures that have been intensified by the rising geopolitical tensions in Europe. The Bank of England expects inflation to fade over the medium term to a little over 2% in a two-year horizon.

The BoE was the first major central bank to hike interest rates since the pandemic hit the global economy a couple of years ago. The bank increased interest rates in December by 15 bp and in February and March by 25 bp each meeting. The upcoming hike will bring UK borrowing costs to 1%.

UK inflation rate surged to a multi-decade high at 7% in March. Inflation is now expected to overshoot 8% after the massive movements in energy prices. The BoE may have to hike rates multiple times in order to tame inflationary pressures.  This will leave another four rate hikes on the table for this year.

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