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Will the Next Fed Hike Sink Market Confidence or Bolster It?

Will the Next Fed Hike Sink Market Confidence or Bolster It?

John Kicklighter,

Talking Points:

  • Over the past eight years, monetary policy has helped shore up global economic health and financial stability
  • The transition of the US monetary policy has unnerved the market with periods like the 'Taper Tantrum'
  • While there is considerable complacency in expectation of central bank support, hikes also infer optimism

See the DailyFX Analysts' 2Q forecasts for the Dollar, Euro, Pound, Equities and Gold as well as our favorite 2016 trading opportunities in the DailyFX Trading Guides page.

It seems relatively straightforward: the tightening of US monetary policy undermines investor confidence that has been significantly buoyed by their and other central banks' extreme support. We have evidence of this dynamic in events like the Taper Tantrum. When the FOMC backed off their massive QE3 program, the global markets - Emerging Markets in particular - responded with panic and sharp declines. Yet, the December rate hike came with a delayed response from risk-oriented assets like US equities. Recently, as rate expectations have firmed, we have actually seen benchmarks like the S&P 500 rise. There is a positive implication to rate hikes in that they necessitate robust enough views of the economy that it can motivate the Fed to break from the global approach of unlimited easing. So, will a rate hike cause sentiment to collapse or perhaps rise? We discuss that in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.