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Will the Fed Raise Interest Rates Again to Fight Inflation?

The US Federal Reserve meets on Wednesday, July 27 when it releases its monetary policy statement.

Will the Federal Reserve raise interest rates again to fight inflation?

Market expectations are yes, there will be another rate hike in July. The central bank appears determined to control inflation, which hit 9.1 percent in June. A rate hike of at least 0.5 percent would raise the Fed's overall forecast to 2.5 percent from the current 1.75 percent.

US economic growth was at a slow pace in the first half of this year and was slightly followed by an increase in the inflation rate. One school of thought says that after negative first-quarter growth of -1.6 percent, the US slipped into a technical recession in the second quarter. Others point to strong employment levels and a resurgent economic sector after the COVID-19 pandemic restrictions.

The latest US GDP growth rate will be released on Thursday, July 27, one day after the Fed rate decision. When a technical recession hits, the US dollar can experience volatility as the currency may lose some of its current support. Market sentiment appears to be stabilizing as spot gold prices edge higher ahead of the upcoming red flag trading event this week.

EURUSD dynamics changing?

Last week, the EUR rose on improved sentiment after the European Central Bank (ECB) decided to raise its interest rate forecast to 0.5 percent from zero. Having struck a balance ahead of the ECB decision, the EURUSD momentum could shift further if the US slips into recession. If the EUR becomes more competitive now that the ECB is on a hawkish stance, it is likely to increase buying power within the trading bloc.

Also, US Durable Goods Orders for June will be released on Wednesday, July 27th. The results will provide more insight into whether inflation is holding back investment and spending. The value is likely to fall from 0.8 percent in May to minus 0.2 percent in June. Any surprise can affect the USD.

Finally, Australia announced its quarterly consumer price index (CPI) results for the second quarter. Inflation is expected to have eased to 1.8% in Q2 from 2.1% in Q1 and any shock to expectations could move the AUD cross.

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This material does not contain, and should not be construed as, investment advice, investment recommendation, offer or solicitation of any transaction in any financial instrument. Please note that such trading analysis is not a reliable indicator of current or future performance as circumstances may change over time. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks.