The Fed is widely expected to hike interest rates by 75bps this Wednesday. Short-term interest rate markets are seeing it as a 100% probability and the same markets have a 79% chance of a larger 100bps hike. The expectations for larger hikes have increased after last Tuesday’s US CPI print where the headline and core both beat expectations as the US saw the biggest jumps in rental inflation since 1991. World economies are struggling to hike interest rates quickly enough to bring multi-decade high inflation under control. They are doing this despite economies rapidly slowing and in the context of a lag between rates being hiked and inflation being impacted. They are ‘behind the curve’.

These more hawkish Fed expectations have kept stocks and precious metals pressured, but the USD bid. Here are three different markets to trade over the Fed meeting and the best opportunities that the Fed could present by its communication.

US Stocks

The Dow, Nasdaq, and S&P500 all fell very sharply after the latest high CPI print. The falls were made worse by expectations that US inflation had peaked, but the data said otherwise. So, if on Wednesday the Fed hikes by 75 bps, but starts to show that it is looking ahead to slow the path of rates then stocks can rapidly gain.

Silver and gold

Both of these precious metals are very sensitive to interest rate moves. So, if the Fed hikes by 75bps (or lower) but shows concerns for a US economic slowdown then silver and gold can both gain out of the meeting. However, if the Fed hikes by 75bps+ and really hammers home its determination to bring inflation under control then both silver and gold can see another leg lower.

USD

The USD will respond to Fed messaging in the following way. The higher the rate hike and the tougher the Fed message on inflation the more bids the USD is likely to see. Any sign of the Fed signaling an end (or a sooner end/lower terminal rate) to its current hiking signal is likely to be USD negative. So, the best outlook for trading would probably be if the Fed takes a more dovish stance. This would favour short USDJPY (think US 10-year yield play) and it will also tally with the BoJ’s latest concerns over JPY weakness.