The Fed can give higher weight to the current conditions and hold the rate longer

[walid]

• The markets are waiting for very important event next Thursday which is Fed's interest rate decision, while the market participants are still divided between raising and keeping.
• The Fed can hike the interest rate, after the achievements which have happened in the US labor market which brought down the unemployment rate to 5.1% last August which is the lowest level since April 2008 to get over the credit crisis impact on the labor market.
• The capacity utilization is running at good convincing level and the wages rising can gain momentum.
• The Fed can raise the interest rate for the first time since 2006 to say that its confidence in the economic recovery is rising and no need to worry about it, despite the Chinese economic slowdown.
• The US economy could get over the harsh winter impact and it has grown annually by 3.7% in the second quarter of this year, after growth by only 0.6% in the first quarter.
• The housing market is also able to get better and there is no worries about the current tame inflation pressure, as the economy is still in an up cycle, the wages can boost the prices later.
• While the impact of the oil prices falling can diminish later next year to watch higher broad inflation figure and also higher core figures.
• So, if the Fed is to look to the future, it is to raise the interest rate and send optimistic message about the US economy.
• But if it is to look at the current market conditions and the worries about the economic slowdown, it won't.
• As it is obvious that there is no inflation pressure on the Fed to make it in rush to raise rates.
• We have seen recently July PCE rising yearly by only 0.3% which is far below the Fed's 2% inflation target over the medium term.
• While taking an action to start raising rates in US currently can push the greenback up and suggest higher probabilities of meeting negative PCE yearly rates which cannot be welcomed by the Fed.
• The greenback can rise up further versus the Yuan " which is unwanted by the Fed" and the greenback can make progress against the main currencies.
• Beside the current suffering of the lower grading currencies such as Russian rubble, Turkish lira ......... because of the Chinese crisis which is still containing the market sentiment.
• Hiking the interest rate currently will weaken the monetary accommodative stance of the Fed and can raise the speculations of watching further tightening steps putting more weights on the US equities.
• Hiking the Fed Fund rate for the first after keeping it between 0.25% to zero since December 2008 can dampen the commodities and energy prices which are actually depressed.
• While the decision of hiking the interest rate in US itself can generally cause problems to the other central banks and drive the cost of borrowing up by God's will.

• Note: it is important to take care of the impact of that decision, as the discount is nearly 50% to 50% which is meaning that there is high probability to watch aggressive reactions in the markets with high volatility you may not want to see.

Have a good day
Kind Regards
FX Market Strategist
Walid Salah El Din
Mob: +20 12 2465 9143
E-Mail: mail@fx-recommends.com
http://www.fx-recommends.com