Currency markets will closely and attentively follow tomorrow, Wednesday, the release of the US Federal Reserve decisions regarding monetary policy, which will be followed by a press conference by the bank governor, Jerome Powell, to comment on these decisions. This will have a strong impact on the trading of the US dollar against currencies and some other commodities like gold, in addition to the US stock market and digital currency markets. Below is an overview of the circumstances of this decision and how it affects the markets:

First: Economic conditions and their impact on US Federal Reserve decisions

Since the US Federal Reserve meeting last September, many important economic data have appeared that had a strong impact on the movements of the US dollar, major currencies, and various markets, supporting the continuation of the Federal Reserve accelerating the pace of interest rate hikes this month, with inflation data at the forefront.

Looking at these data, we find that the US inflation index recorded about 8.2% last September, higher than market expectations that the index would record about 8.1%. However, this is lower than the previous reading which recorded about 8.3% last August.

At the same time, US labor market data showed strong improvement, as the non-farm payrolls increased by 263,000 jobs in September, better than market expectations indicating an increase of about 248,000 jobs. At the same time, the US unemployment rate remained steady at 3.5%, better than market expectations and the previous reading which recorded about 3.7% at the end of last August.

Therefore, the positivity of inflation and labor market data exceeding market expectations will increase pressure on the US Federal Reserve to continue accelerating the pace of monetary tightening, specifically during tomorrow’s meeting in an attempt by the bank to control the high inflation rates.

Second: Statements of US Federal Reserve members on interest rates:

The tone of many US Federal Reserve members' statements in the past period tended towards continuing to accelerate the pace of monetary tightening to control high inflation, especially with the continued improvement in the labor market conditions and its not being strongly affected by interest rate hikes in past meetings. However, some members emphasized the need to be cautious and not raise interest rates too rapidly so as not to cause a strong economic recession.

In this context, US Federal Reserve member Harker stated that the Federal Reserve will continue raising interest rates for a period of time, and that the Federal Reserve needs to see a continual decline in inflation to change its monetary policy expectations. The US Federal Reserve will also actively try to slow the economy to limit new inflation, but it is likely that the interest rate will be much higher than 4% by the end of the year.

On the other hand, US Federal Reserve member Mary Daly stated that the Federal Reserve wants to avoid economic contraction resulting from excessive monetary tightening, that rent price inflation has started to slow down, and also that the Federal Reserve needs to make every effort not to over-tighten monetary policy. The US Federal Reserve needs to study the implications of the tight monetary policy now.

US Federal Reserve member Daly warns against excessive monetary tightening

Third: Major banks' expectations for US Federal Reserve decisions:

Most major banks' expectations still indicate that the Federal Reserve is likely to raise interest rates by about 75 basis points because the Fed will try to curb inflation by continuing to tighten monetary policy at a very strong pace. David Solomon, CEO of the famous American investment bank Goldman Sachs, stated that the US Federal Reserve may significantly raise interest rates beyond its final expected range of 4.50% to 4.75%, unless there are radical changes in American consumer behavior or real inflation declines.

Also, Bank of America expected the Federal Reserve to raise interest rates by 75 basis points and 50 basis points in its remaining two meetings this year, followed by two increases of 25 basis points next year, so that the bank can control high inflation.

At the same time, economists at UOB Bank expected the Federal Reserve to raise the interest rate at the November meeting by 75 basis points to reach 4.00%, and also expected UOB Bank analysts that the Fed would raise the interest rate by another 50 basis points in December.

Fourth: The expected scenario for upcoming US Federal Reserve decisions:

In light of the above, the scenarios for the US Federal Reserve decisions are represented in three scenarios: the first scenario is the Federal Reserve raising interest rates by 0.75% at this meeting, but the interest rate statement and the bank governor’s press conference may talk about concerns regarding economic slowdown, perhaps strongly hinting at slowing the pace of interest rate hikes in the coming period. If this scenario occurs, it may have a clear negative impact on the dollar, while conversely, the currency markets may see a rise in both gold and digital currencies, which is the currently likely scenario.

The second scenario is the Federal Reserve raising interest rates by about 0.75% to rise to 4.00%, but the Federal Reserve may continue to affirm the continuation of the tight monetary policy and that it will raise interest rates strongly to control high inflation. This scenario may happen and is not excluded in light of recent economic data, and it will provide strong support to the dollar index which may rise toward 113 points, which will negatively affect gold and digital currencies.

Finally, the third and currently unlikely scenario is the Federal Reserve raising interest rates by only about 50 basis points, and talking about the economic slowdown and the economy being affected by raising interest rates in the past period, especially as the economy is headed for a mild recession according to major banks’ expectations. This scenario may have a very strong negative impact on dollar movements in currency markets, and conversely, both gold and digital currencies will rise significantly if this scenario materializes.