02.05.202211:54 Forex Analysis & Reviews: Fed meeting outcome could trigger rally on Wall Street and push USD down?

Global stock markets closed April mainly in the red on the back of a few crucial factors that could leave a long-lasting imprint. First and foremost, the strongest-in-decades inflation has become the problem for the whole global economy. Though the Western experts attribute it to the hostilities in Ukraine and personally to President Putin for political reasons, this is not the case. The culprit of soaring inflation is the crisis of the Western economic model that has been imposed for the recent 40 years. This model is based on robust consumption amid highly leveraged businesses and population. People and businesses were pushed into debt.

The second negative factor remains the war in Ukraine that has worsened headwinds in the global economy. The third and the most meaningful factor for the time being is a cycle of monetary tightening launched by the US Fed on the back of rampant inflation. Higher interest rates amid soaring inflation set the stage for an economic downturn in the US. The fact of slipping into recession has been acknowledged officially. Recently, the US reported preliminary GDP data for Q2 2022. The national output contracted by 1.4% sequentially. Besides, though Germany's GDP showed expansion to 0.2% from -0.3%, analysts allow for statistical error in the revised data. They warn that the largest European economy is also on the threshold of a downturn. The economic weakness has not developed into a full-fledged recession because the ECB is desperately unwilling to increase interest rates amid the ongoing inflation acceleration in the EU. The thing is that the EU economy cannot keep afloat this way. It means that the euro area and Germany in particular are facing a full-blown recession.

What consequences will financial markets suffer?

To begin with, the military conflict in Ukraine has triggered a massive capital flight from the US and Europe. The domestic stock market will benefit from it. Yes, at present, the stock market is weighed down by expectations of a sharp rate hike of 50 basis points at the Fed's policy meeting that will be held in May 3-4. Fed Chairman Jerome Powell might announce that further rate hikes might not be so aggressive. So, the sharp rate hike in May might be followed by rate hikes of 25 basis points at each of policy meetings. If so, a moderate pace of monetary tightening could revive demand for cheap stocks that, in turn, might put a lid on the US dollar's rally. Recently, the greenback owes its strength on Forex to aggressive manner of raising borrowing costs.

The least-expected scenario could defy market expectations. It might happen that the Fed's decisions could boost demand for risky assets across the board. Nevertheless, analysts do not rule out such developments. Thus, we could expect a start of rally on Wall Street.