In addition to tomorrow's CPI data release, we have the FOMC meeting, which is currently the most important macroeconomic event for financial markets. The Fed will announce its decision regarding interest rates. There is only a 0.6% chance that a rate cut will be announced tomorrow. The expectation is that interest rates will remain unchanged. Overall, there are three possible scenarios for tomorrow:
- Lower interest rates: Very optimistic, as this is unexpected. This outcome would cause a massive rally in financial markets and BTC. However, this is a very unlikely outcome.
- Rates remain unchanged: This is neutral as it is in line with expectations. This should be a relief to the market if Powell does not sound too hawkish at the meeting.
- Rising interest rates: Very bearish for financial markets and risk assets. Positive for the USD. However, this is also unlikely as Powell has already said that raising interest rates is not an option.
Recent economic data shows that the US economy has been hurt over the past few months due to the Fed's tight monetary policy. GDP growth has been lower than expected and unemployment has reached a 2-year high of 4%. The Fed certainly expected below-trend economic growth, which is why recent economic data is not that surprising.
It is still important to understand whether the economy has been damaged beyond the Fed's expectations, meaning that recent data has increased pressure on Powell to cut rates. We may have a smarter view on this after tomorrow's press conference. The inflation data over the past few weeks has not been that bad either.
Given that we have CPI data and a Fed rate decision, there are a wide variety of possible outcomes, which makes it impossible to predict what might happen. Ideally, we would get good inflation data (lower than expected or in line with expectations) and Powell would be more dovish than hawkish. In other words, he would sound more willing to cut rates than to keep them high for a long time.
Tomorrow could be very volatile, which is why you should be careful trading leverage. If nothing extraordinary happens, I think the entire market will breathe a sigh of relief once the CPI data is released and the FOMC meeting is over. The general consensus is that there will be no more rate hikes, so any event that does not indicate a turn in that narrative will likely be bullish for the market following these two events.
