The Federal Reserve decided not to change interest rates for the first time in more than a year. However, some officials have hinted that another 50 basis points of rate hike could be introduced if inflation does not abate quickly.
Despite the efforts made so far, inflation still remains at high levels, far from the 2% target set by central banks.
The Fed and the ECB are realizing that predictions of a rapid drop in inflation are proving to be wrong, which will lead both central banks to be more aggressive with rate hikes.
In the coming quarters, I expect interest rates to be close to 6% in the US and 5% in Europe. This forecast is not shared by financial markets, which believe that central banks will take a break in the short term.
However, interest rate estimates have been revised, and a more significant increase is expected than previously forecasted by Wall Street economists. Financial markets are hopeful that another upward revision will not occur.
The signs on inflation are not positive.
The Fed expects the core personal consumption expenditure price index to grow over last year's forecast, at an annual rate of 3.9%. This is a significant increase from the previous estimate of 3.6%.
The Fed has a tough job ahead of it: raising interest rates enough to limit inflation without triggering a deep recession. However, opinions on how to achieve this goal differ among officials.
Most Fed officials suggest the key rate will rise to 5%-5.75%, with some expecting a more significant increase. However, only two members suggested the Fed may have done enough when it comes to raising rates.
Macro data has recently come in below expectations, suggesting that the US economy is starting to show signs of weakening.
The official data on the GDP of the United States will be released on June 29th, and I expect to see some non-positive results.
Unemployment reached 3.7% in May and is expected to reach even higher in the coming quarters.
Increasing volatility in US markets, caused by high prices and rising interest rates, could have a significant impact on the markets. The dollar is already seen as a very attractive safe-haven asset, and is likely to become even more popular at this stage.
A strong dollar will negatively impact the prices of bitcoin and commodities, such as natural gas, gold and oil.
I want to take advantage of the strength of the US currency, so I will open a buy position in US Dollar Index Futures and a sell position in EUR/USD.
On EUR/USD I expect a value of 0.95 in the next quarters.
Author's note:
The information and content provided on this site should not be considered as an invitation to invest in the financial markets. The Content is a personal opinion of Mr. Antonio Ferlito.