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The U.S. is slated for a midterm election next month, in November 2022. President Biden will face an acid test about how the average U.S. citizen receives him to be. And there will be lots of development to pump up the election.
Inflation has to be brought down. Unemployment rates have to be brought down. Per capita incomes must go up. There must be goody, goody things in the economy. You know the drip…
These things will move the markets in a big way. So, let’s understand how we can position ourselves to get some potential profits in this election led market shift.
One of the key things to focus on is the Federal Reserve’s monetary policy decisions.
The FOMC last month raised its key interest rate by 75 basis points. This was the third outsized rate hike by the Fed this year. In fact, Fed officials said they will continue to act aggressively to cool the economy and avoid a repeat of the early 1980s – the last time when U.S. inflation got out of control.
The FED is talking about 125 Basis Point Hikes next time around – major market move potential.
However, with the elections in place, many are pressing for a halt in rate hikes.
Why is that, you ask?
Because the Fed can’t keep raising rates as the economy weakens.
Rising prices are hurting wallets, the economy keeps inching towards recession, employment numbers remain shaky, and add to that the rising oil prices – all of it is concerning for the government and the Fed as the election season nears.
Here’s what the UN Conference on Trade and Development warned of the ramifications that the interest rate hikes could have globally…
In a decade of ultra-low interest rates, central banks consistently fell short of inflation targets and failed to generate healthier economic growth. Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is an imprudent gamble.
This year’s interest rate hikes in the United States are set to cut an estimated $360 billion of future income for developing countries (excluding China) and signal even more trouble ahead.
The International Monetary Fund (IMF) is also pressing for no further Fed hikes for similar reasons.
So, what can the government and the Fed do about this? – Same old goody, goody things.
They can ease out the rate hikes in the upcoming monetary policy meetings.
Basically, it will pump up the election by going easy on its rate hikes.
This could give stock markets a breather and help them recover from the record lows they have recently witnessed.
However, as most things, nothing in an economy moves in isolation.
The halt in rate hikes can be troubling in that it can raise inflation further to record levels.
So, either way, the Fed has a difficult choice to make. And the decision can have a huge impact on markets.
Lastly, what does all of this mean for currency markets? Where can we expect the dollar to move?
You see, before elections, every politician would want inflation to be low, so they get a clean bill of health and a clean chit from voters about a good job that they’re doing.
And that’s what President Joe Biden and the U.S. Federal Reserve will more likely attempt to do.
They will want to keep the dollar up so that they can manage inflation without raising rates and they can basically manage their external debt as well.
Remember, the U.S. is one of the world’s largest debtor nations. Now, the way you can manage, or at least partly manage your debts, is to make your local currency so strong that you have to spend very few dollars to repay the nation you owe money to in their currency.
The U.S. also imports a lot of stuff. And if the dollar is strong, the landed price of important goods in America remains low, which can subdue inflation.
So, we can expect a strengthening dollar in the coming months.
On the other hand, we can also likely expect a further fall in the Japanese yen. Note that Japan has been intervening in the FX markets more so than it has in the past. It is buying yen for the first time since 1998 in an attempt to shore up the battered currency. Moreover, it is not looking to back-off on a low interest rate regime anytime soon.
In all, with a strong dollar and weakening yen, we can look out for some USDJPY setups to potentially profit from the major shifts in the FX markets.
Our top analysts have been reading these setups and their charts seem to be forming an exciting pattern in the current market.
Know about these setups and trade them LIVE with our pros in our upcoming webinar by clicking HERE.
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