Will the Fed Raise Interest Rates Again to Fight Inflation?

July 26, 2022 10:02

The US central bank meets on Wednesday, July 27, when it releases its monetary policy statement. 

Will the Federal Reserve raise interest rates again to fight inflation?

The market’s expectation is yes, there will be another interest rate hike in July. The central bank appears determined to tamp down inflation, which reached 9.1 percent in June. 

Growth in the US economy moved into the slow lane in the first half of the year and was easily overtaken by speeding inflation rates. One school of thought holds that the US fell into a technical recession in the second quarter following negative growth in the first quarter of minus 1.6 percent. Other opinions point to resilient employment levels and re-emerging sectors of the economy following COVID-19 pandemic restrictions.

The latest GDP growth rate in the US will be released on Thursday, July 28, one day after the Fed’s interest rate decision. If there is a technical recession, the US Dollar may go through volatility because of the possibility the currency could lose some of its current support. Market sentiment appears to be hedging as gold spot prices edged up ahead of the red-flag trading events coming up this week.

EURUSD dynamics change?

Last week, the EUR rose on better sentiment after the European Central Bank (ECB) decided to lift key interest rate guidance from zero to 0.5 percent. After hitting parity prior to the ECB’s decision, the EURUSD’s dynamics may shift further if the US drifts into recession. If the EUR becomes more competitive now that the ECB is on a hawkish course, it would likely shore up spending power within the trading bloc.

In other news, US Durable Goods Orders for June are set for release on Wednesday, July 27. The results will shed more light on whether inflation is slowing down investment and spending. The gauge is expected to have fallen from 0.8 percent in May to minus 0.2 percent in June. Any surprises could impact the USD.

Finally in trading news, Australia announces its quarterly Consumer Price Index (CPI) results for the second quarter. Inflation is expected to have fallen from 2.1 percent in the first quarter to 1.8 percent in Q2, and any shocks to expectations could move the AUD currency pairs.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.