How the Fed decision will impact crucial MENA markets
- The Fed is expected to raise rates again: Another 25 basis points rate hike is expected, but it could be the last.
- Gold should remain positive: A run higher towards $2000 could be seen.
- Oil negative outlook continues: The pressure on oil remains on the downside although an initial relief rally could be seen
A Fed rate hike is on the cards
There has been considerable market turmoil created by a banking crisis in the US which moved to hit the sector in Europe too.
It does leave the Federal Reserve with a big decision to make: to hike or not to hike.
Markets are expecting the Fed to hike by 25 basis points this week. That would take the Fed Funds rate target range to 4.75%/5.00%.
However, according to interest rate futures, this could be not only a “dovish hike” but also the last one. A dovish hike is an increase in the interest rate that comes with a cautious warning about further decisions.
According to the CME Group FedWatch tool, US interest rate futures see a 83% probability of a 25bps hike but it is around 50/50 whether any further rate increases will be seen.
What is driving the Fed decision
The Federal Reserve is fighting against two contradictory forces:
- Inflation is still too high – this needs to be tackled by using aggressive/high interest rates.
- A banking crisis in the US – this requires a more cautious approach, perhaps even rate cuts
A rate hike and then a pause after that is likely. However, once paused, it will be very difficult to restart hikes.
The impact on key MENA markets
The market impact is likely to be one to drive a near-term relief rally for riskier assets.
In MENA, gold and oil will be two massively important markets we will be watching.
We believe that the likely “dovish hike” would be:
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Positive for gold: The USD would be negative and this would help to pull gold higher.
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Near-term positive for oil: It would help market sentiment and would help to pull oil higher initially. Further out though, oil is under downside pressure from the broader concerns traders have for the global economy.
However, if the Fed keeps rates flat, this would reflect real concern for the state of US banking. That would likely mean:
- Gold moves strongly higher
- Oil would be volatile but likely move lower in due course.
Gold to move higher
Gold moved above $2000 last week, we believe this could be seen again.
The outlook for gold remains positive because of the market turmoil seen recently. But also if the Fed is cautious as it increases interest rates, it would be USD negative, which would help gold.
Gold would be even stronger if the Fed stopped raising rates entirely. Gold is a safe haven asset and is helped by broader market concerns.
The technical analysis remains positive on gold to buy into any near-term weakness:
- Gold is unwinding the run higher, but there is good initial support between $1929/$1960.
- All moving averages are rising.
- The daily RSI is unwinding from above 70. This is a near-term move that should help to renew upside potential.
A move below support at $1885/$1900 support would question the continued recovery.
Brent Crude oil is rebounding near term
The big selling pressure has just eased off for now and Brent Crude oil is rebounding.
A bullish “hammer” one-day candlestick reversal from $70.15 has improved the near-term outlook.
However, the medium-term outlook has turned decisively negative since breaking below $75.55 support.
As the daily RSI unwinds from 30 there is scope for a near-term rally.
However, there is big resistance from the overhead supply of all the old stale bulls that bought between $75.55/$80.50.
We would expect this to be an area where rallies now fail in the coming weeks.
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