Last week brought a long-awaited answer to the increasingly impatient question of when the Fed will stop raising interest rates. From the “body language” of Jerome Powell at his press conference after the regular meeting and a fairly decent barrage of speeches by the board members, the market concluded that there will be no further increases in the foreseeable future. The prices of government bonds, which fell into increasingly threatening losses throughout 2023, experienced a rally. Equity indexes, which settled below major moving averages before the session, also miraculously bounced back. Traders and investors got their long-deprived dose of dopamine.
However, this initially positive conclusion of the two-year campaign to tighten the interest rate environment hides changes that are very problematic for many economic entities. First of all, it is necessary to realize that the interest rate, which has risen from dead hibernation to non-zero values, will play a very significant role in the economic decision-making of consumers, investors and entrepreneurs in the future. It is no coincidence that the increase has taken place at a time when the world is once again splitting into two political camps with incompatible systems of governance. The need to deglobalize trade flows and ensure defense will be superior to fiscal discipline, so the only weapon against the threat of inflation will be monetary instruments, among which the interest rate is the most important.
Unpleasant effects will be experienced by the “drug-addicted” industries, which are especially the real estate business and startup business. Non-zero interest rates will have a positive effect on banking, primarily European banking. A non-zero interest rate, which is, among other things, the price of money, means that banks will trade with something that has a non-zero value, which is clearly an advantage. Another branch is savings, whether short-term or pension. Investments in risk-free government bonds will become an essential part of portfolios alongside the hitherto preferred stocks. People will be forced to take care of their savings more actively if they do not want them to lose their purchasing power. All this will bring new products and new approaches.
After last week, we can declare that the modern financial normal has passed its first meeting. In the coming break, we can enjoy a glass of white along with the “Santa Claus rally” on the US stock indexes, reminisce about the old days and look forward to the second act, which will surely be even more interesting than the first.
OUTLOOK FOR TODAY
The dollar is currently traded against the euro at the RoklenFx online exchange at a mid-rate of 1.0737 EURUSD, the dollar index is then at 105.00 points. During the day, the EURUSD rate should range from 1.0647 to 1.0777 EURUSD.**
The koruna is currently traded against the euro at the RoklenFx online exchange at a central rate of 24.40 EURCZK, against the dollar at a central rate of 22.73 USDCZK. According to our prediction, the exchange rate against the euro should remain in the range of 24.33 to 24.53 EURCZK, in a pair with the dollar from 22.64 to 23.04 USDCZK.**
**According to the models used, the average nominal exchange rate, published by the ECB, will with a high probability be in the mentioned interval. Currency rate predictions are based on a time series model that takes into account the previous value of the rate as well as its past volatility. In order to determine future volatility more precisely, the model also includes a macroeconomic data publication factor. The model is thus able to determine when to expect increased or decreased volatility of the exchange rate.
Disclaimer: This article is only informative and does not serve as an investment recommendation according to Act No. 256/2004 Coll. about doing business on the capital market. In preparing this article, the author relied on publicly available sources. Neither Roklen Holding as nor Roklen360 as are responsible for any errors in the text or data.
Source: RoklenFx, Bloomberg, Reuters, ECB, Fed, CNB, TradingView, CME