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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

71% of retail investor accounts lose money when trading CFDs with this provider.

Market Insights

US Fed preview July: July is “live” for rate hike

FED EN

US Federal Reserve (Fed) Interest Rate Decision - Fed date: Wednesday, 26 July 2023, Time: 6:00 PM UTC

July is “live” for rate hike

The below chart illustrates the five year to date performance of the US Fed funds rate.

Since there will be no US Federal Open Market Committee interest rate decision for August, the July Fed meeting traders will focus on two possible key discussions:

1. Will the Fed signal another hike for September?

If so, then the US benchmark interest rate will be getting a lot closer to reaching 6%, but let's not get too far ahead since the June inflation rate was soft. That being said, expect to hear the US Fed Chairman Powel use the words “and further policy decisions are data dependent” during the July policy meeting.

2. How long does the economy need to feel the impact of higher interest rates?

The Fed has hiked 500 basis points (5%) during the last 16 months in order to restore price stability e.g. high inflation, and it’s been working, but inflation remains above the Fed's 2% target.

It's all data dependent!

Do not hold your breath waiting for the Fed Chairman to make any commitments that he will stop hiking the rate in September.

Key data on deck before the September meeting:

  1. Consumer price index (CPI), there are two more consumer inflation reports expected before the September meeting
  2. Two nonfarm payroll (NFP) reports before the September meeting

The United States economic data is still looking solid. In fact, the data suggest an almost perfect balance between growth, inflation, and the employment situation… happy days.

United States Indicators Year to date %
US Dollar Index (2.40%)
SPX500 Index 18%
Unemployment rate 3.6%
Inflation rate y/y 3%
Interest rate 5.25%
Annual GDP growth rate 1.8%
Wage growth 5.74%

Source: Tradingview as of July 21 2023 12:09 UTC

  • Weaker US Dollar suggesting a bullish signal for stock markets
  • Robust stock market; S&P500 +18%
  • Low unemployment at 3.6% is near all-time record lows
  • Inflation remains above the Fed target but moving in the right direction; only 1 year ago inflation was above 8%, and now it’s 3%
  • Interest rate normalization
  • Positive GDP growth
  • Wage growth is now well above inflation
  • Increasing consumer confidence

Financial Conditions Index

Looking beyond the Fed interest rate policy for signs the economy is moving in the right direction.

  • Weaker US Dollar suggesting a bullish signal for stock markets
  • Robust stock market; S&P500 +18%
  • Low unemployment at 3.6% is near all-time record lows
  • Inflation remains above the Fed target but moving in the right direction; only 1 year ago inflation was above 8%, and now it’s 3%
  • Interest rate normalization
  • Positive GDP growth
  • Wage growth is now well above inflation
  • Increasing consumer confidence

Financial Conditions Index

Looking beyond the Fed interest rate policy for signs the economy is moving in the right direction.

NFCO down -0.37% during the week of July 14th, suggesting that the US financial conditions within the very large “shadow” banking system has very little liquidity risk issues.

Lower NFCI values indicate loose financial conditions which suggest healthy financial conditions, and higher NFCI values indicate tight financial conditions suggesting higher financial risk.

Think of loose financial conditions as oil in the economic engine, implying that businesses feel more comfortable extending credit to clients, thereby helping the economy run more smoothly.... negative NFCO readings are considered a positive economic indicator, in the above sense.

At face value, the above is a very interesting alternative index investors and traders could use as an alternative method to measure the “risk on” or “risk off” market views.

What’s next for stock markets?

The Dowjones 30 index is widely followed and is considered the benchmark for measuring the stock performance of 30 of the largest US publicly traded companies.

The Dowjones 30 index hit fresh 52-week highs last week, will European, Asian, and emerging stock markets around the world follow the Dowjones 30 next moves?

Technical commentary

The Dowjones 30 index is in an uptrend, this can be technically supported by the fact that current price is above its 10 week and 40 week moving averages, higher price sequence on tops and bottoms (October 22 - current), as well as rate of change 6 week and 13 week being above their respective zero lines. Therefore long positions for the medium term (26-49 days) trader could be seeking a potential upside price extension towards the $36,750s while downside risk below the $34,700s could expose the lower $33,590s.

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This week's US Fed interest rate decision could signal to traders and investors that, for the moment, financial conditions are solid enough to handle potential Fed meeting surprises.

Go for it, Fed do your thing!

Happy trading.

Not investment advice. Past performance does not guarantee or predict future performance.