The Two Events That Have Traders On Edge This Week

Close up of the Wall Street sign with the American flag in the background
Credit: Carlo Allegri - Reuters /

Investors have reason to be on edge heading into this week because of two major events that are expected to have a profound impact on the stock market. Market participants don't anticipate much action from one of the major central banks at one of the events, but the tone of their speech is likely to affect the market. The other major event is also about the rate hike cycle by another important central bank. It is expected that another rate hike will take place there, but traders are on edge because of uncertainty over when the cycle's peak will be reached and how much the central bank is willing to risk before it's too late to undo the damage it's caused by its own poor decisions.

The Events

The Federal Reserve will announce its interest rate decision and economic projections on Wednesday. Market investors do not anticipate any more hikes to the Fed Funds Rate from the present level of 5.50%. However, the most weight is expected to be given to economic projections and the Fed's speech.

Second, the monetary policy meeting of the Bank of England will be the main focus of traders. There is widespread expectation that the bank, when it announces its monetary policy decision on Thursday, will raise interest rates by another 25 basis points, from the current 5.25% to 5.50%. Moreover, the Bank of England's Governor will elaborate on the central bank's present strategy and the extent to which it is ready to gamble in the future to control inflation, which is notoriously tough to manage.

Strategic Approach

Regarding the Fed's meeting and its interest rate, speculators have a bit more clarity than the Bank of England's approach. The previous week's release of the U.S. CPI reading showed a number that was not only stronger than the previous reading but also exceeded expectations: 3.7%, when predictions had called for 3.6% and the prior reading had shown 3.2%. This is the second month in a row that U.S. CPI data has shown and verified that inflation has taken a wrong turn, threatening to undo the Fed's hard work.

This has put extra pressure on the Fed, which is already feeling the heat to take action. Since two inflation readings are not enough to prove a shift in trend, most Fed members have shown their calm side so far, despite a wrong turn in the data. Going into this meeting, I expect the Fed to emphasize that they will continue to raise interest rates if inflation readings continue to climb on the present trajectory, since they cannot afford to let inflation run hot. Their statements will almost certainly make the November meeting quite active, which indicates that a rate rise next month is a distinct possibility.

Since most market momentum from that point on will be driven by speculation, the dollar index is likely to gain ground. The stock market, and the S&P 500 in particular, may be subject to additional corrections, with prices potentially falling below the 100-day simple moving average (SMA) or perhaps below it on the daily time frame.

As for the Bank of England, their options are extremely constrained, as inflation remains elevated and economic activity continues to decline, despite the fact that recent GDP data exceeded market expectations. However, investors and consumers would become even more anxious if interest rates were raised again this week. Prior to the economic and financial turbulence of the last decade, the bank's interest rate increase peaked at 5.69 percent. The bank will be close to that level with this interest rate rise, and data from other sources, including Nationwide and Halifax, continues to demonstrate the housing market is in a severe crisis. Because of the recent interest rate rise and the high likelihood of future rate hikes, investors are on edge. It's possible that the move may lead to a rise in the value of the pound, but concerns over the country's economic activity would likely limit any gains.

In conclusion, the Fed and the Bank of England's moves this week have increased traders' anxiety, and it's probable that additional action will be required from both institutions. The stock markets in the UK and the U.S. are therefore less likely to have a bullish rise, while the currencies of those countries are more likely to benefit from favorable market conditions.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Naeem Aslam

I am a former Hedge Fund Trader with over 15 years of experience in investment banking. During my early career, I was awarded a national award (Young Irish Broker) in 2010. Over the years, I have worked with Bank of America in equity trading and with Bank of New York in hedge fund trading. I specialize in Blockchain technologies (cryptocurrencies and digital assets) and Sustainable Investments. In my career thus far, I have also extensively covered Equities, Commodities and Forex.

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