US500 close to 4,400 before the Fed 📈

Today, all eyes are on the Federal Reserve as investors await the interest rate decision following its meeting. After 10 months of consecutive rate hikes, it is expected that rates will be held at current level this time, marking a hawkish pause in the process. Given the mixed data and divergent views among officials, it is critical to evaluate the various factors at play to understand the potential outcome and implications of the Fed's decision.

Our assessment: the Federal Reserve will indeed hold rates steady today

Why: inflation data is cooling down and potential signs of an economic slowdown - noticeable in the labor market

Markets: Powell's message will likely suggest a "hawkish" pause and keeping July in play. This could lead to a strengthening of the dollar and even a correction in the heated indexes. It's worth noting that the market is currently pricing in the unchanged interest rates, so this will not be a surprise. On the other hand, a lack of changes in the projections might provide extra fuel for an increase in EURUSD or indexes.

Key information to be aware:

• The May CPI softer than expected definitely was a positive sign, contrary sticky core inflation may tell votes apart

• It is expected that some officials, like Minneapolis Fed President Neel Kashkari and Fed Governor Michelle Bowman, might disagree with the decision. If this happens, it could show that the members have different opinions about the economy.

• Assuming rates to be kept unchanged, Powell probably will reassure that it is just a brief halt, not definite end of cycle, considering the unpredictable and prolonged effects of monetary policy.

• The market only prices in a 15% probability of a rate hike during today's meeting and 60% at the July meeting.

• The May statement included changes suggesting the possibility of the last hike, although Powell announced that it may not be the end yet.

• The market expects a slight increase in the median for the interest rate this year to 5.3% from the level of 5.1% (the midpoint of the rate range). Keeping the median at the unchanged level should be treated dovishly and announce the end of the cycle. However, there is a chance to raise the median for the next and the year 2025.

• Many Fed members suggested a soft landing scenario for the US, which should lead to a reduction in unemployment rate projections. At this point, the unemployment rate is 3.7%, and the projection is 4.5% by the end of the year. The market expects a reduction in the projection to 4.3%.

• The inflation forecast will also be important, which is currently at 3.6% for core PCE at the end of 2023. An increase to 3.7% is expected. Maintaining or lowering would be a dovish signal.

In conclusion, while we expect a hawkish pause today, the future course of action will depend heavily on a combination of factors including inflation trends, economic indicators, and the resilience of the financial sector. As we move forward, the Fed's navigation through these complex economic conditions will remain a critical driver of the U.S. economy's health.

The returns on S&P 500 (US500) after the last rate hike. Source: Bloomberg, XTB.

US500

S&P500 (US500) is showing strong bullish momentum, marking the fifth consecutive day of gains. The index currently sits at 4,378 points, edging closer to the resistance level at 4,400.