The interest rate decision by the US Federal Reserve on July 26 will be a major market mover. As FOMC (Federal Open Market Committee) officials begin the two-day meeting, CME FedWatch Tool shows a 98 percent probability of a quarter-point hike .
The expected hike will come after a pause taken by the Fed in June. After 10 consecutive hikes in over a year, the Fed had halted monetary tightening last month to give policymakers more time to assess the health of the US economy. The pause was also necessary to assess the impact of banking crisis on lending conditions.
However, inflation in the US still stays above the 2 percent target and the labour market remains tight, which make the case for a 25-bps hike in July, many market experts believe.
In the latest print, the US inflation fell to 3 percent in June from 4 percent a month back. It was below 4 percent for the first time in two years, though aided by high base effects. Core inflation, which has been quite sticky, also declined to 4.8 percent.
"While the fight against inflation might not be over, for example, the core at 4.8 percent is still higher than long-term average of 3.7 percent, the larger part of the battle is done. Disinflationary impulses are getting entrenched. So, the Fed might take one more hike and then go on a pause," Sandip Bansal, Associate Director at ASK Investment Managers told Moneycontrol in an interview.
As for the commentary, experts feel Fed chair Jerome Powell could throw in some dovish statements this time around.
"Despite being above target levels, US inflation is cooling down swiftly. In anticipation, markets have run up on expectations of a pivot by the Fed towards the end of 2023 or early 2024. It is likely that the Fed will hike this time with dovish comments," said Vikas Gupta of OmniScience Capital.
If that's the case, then the 25 bps hike will not spook markets as it is already priced in. Moreover, dovish comments can further push the ongoing rally in Wall Street as well as global markets.
However, the US Dollar Index is flashing some red. It is now at its highest levels in two weeks, making rounds to 101.45-40 during the initial hours of Tuesday's Asian session. The greenback has extended its five-day uptrend ahead of FOMC announcement.
Any hawkish commentary from the US central bank threatens to initiate a further rally in the dollar index, ending the party of FII flows into India and other emerging markets.
Also Read: Will the dollar index usher in a bull run in Indian markets?
Apart from this, the European Central Bank and the Bank of Japan will also announce their interest rate decisions on July 27 and July 28, while the first advance estimates for the US GDP growth for the April-June quarter of 2023 on July 27 will also be watched keenly by global investors.
As for the Nifty, the benchmark hovers near the 19,700 level with immediate resistance at the 19,800-19,900 zone. "The disparity between price and average continues to remain a concern and is getting resolved through profit-booking rallies. The positional resistance is seen at the 20,000 level. Any significant range expansion on the bearish side, coupled with a breakdown of 19,400 level, can intensify a bearish momentum in the index," Viraj Vyas, CMT, Technical and Derivatives Analyst - Institutional Equity at Ashika Stock Broking, said.
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