Going by the past pronunciations by the Federal Open Market Committee (FOMC) members, the interest rates are expected to go up this December. The committee will meet mid next week to deliberate on the way forward. Many economists and financial experts are convinced that the interest rates will go up during this meeting. Recent polls among economists indicate that 87% of them believe that the rates will be hiked.
Recent economic data from the United States seem to support the thesis of a rate hike. On Thursday, the Import Price Index was reported at -0.4 which was higher from the previous one reported. This number however does not carry a lot of weight in influencing the Fed decision. On Friday, three sets of data were released. The month over month retail sales increased from 0.1 to 0.4. The producer price index also reduced from -1.6% to -1.1% beating the consensus forecasts of -1.4%. Lastly, the Michigan consumer sentiment reported was 91.8 which was an increase from the previously reported one which was at 91.3. The employment numbers are increasing while the jobless claims are going down. This is the ideal situation necessary for a rate hike.
However, a few issues seem to derail the tightening. One, the current trends in the oil prices is a key issue that Fed members will deliberate on. The global crude prices have continued to decline in the recent months because of the reduced regulation by Organization of Oil Exporting Countries (OPEC). At the moment, crude prices remain at the mid-30s and with no hope in future, these prices are expected to remain under pressure. Secondly, there is increased concerns about the global economy. With commodity prices down for the year, many countries are currently struggling. This will definitely lead to a weaker global economy.
The Fed raises interest rates as a signal that the American economy is strong. As a result, the dollar is expected to rise. However, traders need to note that currently, traders have already priced in the fed decision in their capital allocation. This is evident in a number of areas. For instance, the price of gold is currently trading in the lowest since the financial crises. Dollar and gold have an inverse correlation. This is simply because investors hang on to gold when the dollar weakens. Secondly, the dollar index is currently trading at the highest levels of all time. Third, the price of crude oil has continued to go down. This is because oil is usually priced in dollar terms and therefore, a strengthening dollar will lead to a weakening oil price.
How to trade this week
As a trader, this will be one of the most volatile weeks to trade. As at now, the CBOE volatility index is near a 5-year high. This signals the amount of fear that investors and traders have. For new traders, this week will lead to significant losses. However, for experienced traders, this will be their best week because of the wide movements expected.
For instance, if the fed do hike on Wednesday, chances are that many new traders will go short EURUSD pair. Sadly, this will be a major mistake to make because as noted above, traders have already priced in the fed interest hike. As a result, many of them will be exiting before making their next moves as planned. Therefore, if you are new to trading, I request that you stay off the market before the fed hikes.
If they do hike, you can decide to own other asset classes which will likely go up. For instance, you can trade gold and American companies. If the fed hikes, this will be a sign of confidence in the economy. As a result, it will be an indication that the companies are doing well this need to go long.
Unfortunately, the fed might also disappoint by not hiking. As a trader, while this is very unexpected, the fact is that you should have it in mind before trading. Therefore, you should always have a stop loss that will help you reduce the losses. You should also use all the necessary risk management tools to reduce losses.