Will the Fed Increase Interest Rate by 0.75% or 1%?

Summary:

Eyes and Ears on today’s FOMC meeting and fed rate hike. Traders, Central Banks, and Governments are waiting patiently for today’s rate decision on the 21st of September 2022. While it is expected that the interest rate will increase by 75 base points up to 3.25%, there are some leaks mentioning the 100 base points increase, and some leaks mentioning the 50 base points increase.

Fundamentals

In today’s article, we will discuss the effect of the three different options of a rate increase. To start with, it is important to know that the Fed is willing to increase the interest rate to fight inflation. While this might be a short-term solution for inflation, it will have a massive effect on the market in the future, and a recession is expected.

What happens if the Fed increase by 75 base points up to 3.25%?

The decision was made earlier that the Fed will most probably increase the rate by 0.75% on September 21st. However, the market already showed a bullish trend for the dollar index since the decision was made. When the actual decision by the Fed is out later today, it might not have a big impact on the dollar index, gold, and other currencies, as the impact was already there last week with Gold decreasing by more than $60. On the other hand, Gold prices might increase further and the dollar index might decrease due to fixing the rate at 3.25% because it will be as expected.

What happens if the Fed increase by 100 base points up to 3.50%?

If Fed decided to increase the rate by 1%, it would an unexpected move from the Fed, and this will result in a bullish dollar index, and all currencies versus the USD will fall, especially Gold. Gold might reach the level of $40 down from $1670 to reach the $1630 level. If Fed increased the rate by 1%, traders are looking to sell Gold at least for the following two weeks.

What happens if the Fed increase by 50 base points up to 3%?

This is the least expected decision to be made. However, if it happened, the dollar index will have a strong bearish trend with major currencies going bullish versus the dollar. Gold will look at an increase of $20-$30 above the $1670 level to reach $1700

Biden’s cabinet and the Fed are trying to seriously fight inflation with all the steps they are taking and are willing to take in the future but raising interest rates could potentially harm any economy. A stronger Dollar means a stronger dollar index, and this will not last long, as a rate increase is only a short-term solution to fight inflation.

Technical Analysis

Will the Fed Increase Interest Rate by 0.75% or 1%? _1

Gold Intraday Chart

The Intraday Gold pattern shows a bullish engulfing with possible prices touching the $1685 level later today.

Support and resistances:

1673.02

1670.84

1668.57

Pivot: 1675.29

1681.92

1679.74

1677.47

Trading Recommendations

High Probability Scenario

Long Above: 1666.00

Target 1: 1685.00

Target 2: 1690.00

Alternative Scenario

Short Below: 1666.00

Target 1: 1659.00

Target 2: 1653.00

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Owen Li

More than a third of people globally could not survive financially if they suddenly lost their income due to climate change-related disasters, according to a new report by Lloyd's Register Foundation.

About 34 per cent of respondents to the World Risk Poll 2021 survey said they could cover their basic needs for less than a month if they were no longer receiving an income, while 12 per cent said their finances would last less than a week, the London-based charity said on Wednesday.

Lloyd's Register Foundation polled 125,000 people in 121 countries for its biannual study.

Loss of Income Due to Climate Change Would Leave Millions Struggling Financially_1

"Financial security is a crucial aspect of resilience," said Sarah Cumbers, director of evidence and insight at Lloyd's Register Foundation. "When people are exposed to a shock or stressor — such as a global recession or a disaster caused by a natural hazard — it can deprive them of their livelihoods.

"We saw this with the Covid-19 pandemic, when many were forced into unemployment. The results of the poll show just how vulnerable people across the world are, making financial support key to improving resilience as climate-related crises become more frequent and more severe."

In 2020, the Covid-19 pandemic tipped the world economy into its worst recession since the Great Depression, forcing countries into lockdowns that led to higher unemployment and reduced salaries, the International Monetary Fund said.

While governments around the world have eased restrictions and reopened economies, the pandemic and a number of recent weather events have highlighted the importance of saving to create an emergency fund.

The current global economic uncertainty — compounded by the Russia-Ukraine war, rising inflation and higher interest rates — have also put the spotlight on the financial well-being of millions of people around the world.

People are more likely to struggle financially in South Asia — where 57 per cent said they could pay their living expenses for less than a month if they lost their income — and in North Africa, with only 49 per cent of respondents able to cover their basic needs for the same period, Lloyd's Register Foundation said in the report.

Meanwhile, 27 per cent of the world's population have experienced some type of disaster in the past five years, with the most common form — those caused by flooding or heavy rain — experienced by 10 per cent of people.

"With climate change-related disasters increasing across the world, illustrated most recently by the widespread floods in Pakistan, the poll's findings highlight a need for policymakers to work together to ensure people are supported in the event of a crisis," the report said.

So far, the flooding in Pakistan has killed more than 1,400 people and caused severe damage.

"I think it is going to be huge. So far, [a] very early, preliminary estimate is that it is big, it is higher than $10 billion," Ahsan Iqbal, Pakistan's planning minister, told Reuters in August.

However, regions considered to have better infrastructure and economic security, such as Australia, New Zealand, and North America, scored higher on the resilience index.

In 2019, the east coast of Australia was devastated by raging wildfires that burnt 7 million hectares of land stretching from south-east Queensland to eastern Victoria and cost the economy an estimated $70bn.

The world's least resilient region, the charity found, was Central and West Africa, where 17 per cent of people said they had experienced a disaster caused by flooding.

"We know from previous analysis that low-income countries have been hardest-hit by disasters in recent years, with one in four people in these countries directly affected by the Covid-19 pandemic and other hazards," said Jenty Kirsch-Wood, head of global risk management and reporting at the UN's Office for Disaster Risk Reduction.

"What's more, low-income and lower middle-income countries lose a greater share of their national gross domestic product as a result of these disasters than their higher-income peers — 0.8 per cent to 1 per cent, compared with 0.1 per cent and 0.3 per cent in high-income and upper middle-income countries, respectively."

Source: The National News

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Devin

Britain has accused the EU of driving up U.K. energy bills by hundreds of millions of pounds per year by blocking cross-Channel energy cooperation following Brexit.

Under the Brexit trade and cooperation agreement signed in December 2020, the European Commission and the U.K. agreed to put in place a framework for future electricity trading which would come into effect this year.

However, a U.K. official said progress on agreeing to vital new trading rules has stalled since the summer, despite multiple attempts by London to secure an agreement amid the worst energy crisis in Europe in decades. The U.K. government believes Europe is dragging its feet due to the ongoing fight over the implementation of post-Brexit trade rules in Northern Ireland.

The lack of an electricity trading framework meant that upon Britain's exit from the EU single energy market on January 1, 2021, the U.K. moved to a more inefficient system for buying and selling electricity through subsea inter-connectors linking Britain with France, the Netherlands and Belgium. This is adding hundreds of millions of pounds per year to the energy bills of British households, according to the U.K. energy industry.

And two years after Brexit, Britain has not yet managed to be readmitted to the North Sea Energy Cooperation (NSEC) platform, an intergovernmental organization to develop offshore wind-farms in the North Sea region and accelerate the transition to renewables. The Commission kicked Britain out of the group in 2020 despite it not being an EU agency, ignoring calls by several member countries and the EU's Green Deal chief Frans Timmermans for the U.K. to remain.

"Given the crisis is all about [Russian President Vladimir] Putin and the war, some questions are being asked about the EU going slow on electricity market and North Sea cooperation," the U.K. official said.

The U.K. is expected to flag this issue again at the upcoming meeting of the EU-U.K. specialized committee on energy, focused on energy security, due to take place on September 28.

A Commission spokesperson said: "The EU is aware of the importance of energy cooperation and is committed to continue working with the U.K. on energy," adding "these issues are highly technical, which explains why progress takes time."

New U.K. Prime Minister Liz Truss and French President Emmanuel Macron tried to rebuild bridges on the issue during their first bilateral meeting, held Tuesday afternoon on the margins of the U.N. General Assembly in New York.

The two leaders "agreed to enhance" U.K.-France cooperation on energy "to reduce volatility in the market and cut costs for households," according to a readout of the meeting shared by the U.K. government. Truss' official spokesman insisted the bilateral relationship on energy remains "close."

Northern Ireland linkage

London argues Brussels is going slow on energy cooperation because of the ongoing dispute over the operation of the Northern Ireland Protocol, a key part of the Brexit divorce deal regulating trade between the region and the rest of the U.K.

In response to the U.K.'s refusal to implement checks on goods entering Northern Ireland from Great Britain, the Commission has frozen bilateral cooperation in a number of other policy areas required by the protocol, such as joint work on scientific research.

But the U.K. says the sheer scale of the energy crisis looming over Europe this winter makes the Commission's delaying tactics over electricity trading unjustifiable.

Adam Bermann, deputy director at the energy industry lobby Energy UK, agreed.

"Our understanding is that the EU has given a strong signal that until negotiations on the [Northern Ireland] protocol is settled there will be no movement on the electricity trading arrangements," he said.

"Whilst we understand the EU's position, we are in an energy crisis today — and when it comes to electricity inter-connectors or cooperation on gas, which is crucial to security of supply this winter, it may be worth the EU revisiting whether these items can be discussed in a bilateral way regardless of the status of negotiations on the protocol."

An EU official rebuffed these claims and insisted the Commission is "collaborating openly with the U.K."

"We are developing a new mandate for industry to further explore the options for the future framework for electricity trading across interconnectors," the official said. "Following some outstanding technical checks with the U.K. side, the Commission will put the proposal forward for Council's agreement on next steps for electricity trading."

Shortage fears

However, there are other reasons why Brexit may hinder the capacity of the EU and the U.K. to tackle energy shortages this winter.

Britain has abandoned the EU's so-called solidarity mechanism on energy, freeing itself from pre-Brexit obligations to cooperate with the bloc in the event of an energy emergency. But this also means the U.K. no longer has a legal right to EU assistance in a full-blown crisis.

"This calls into question how robust the political arrangements are going to be this winter in the event there are any shortages of energy," Bermann said. "I certainly hope that the EU will strongly consider whether, both in relation to the electricity trading arrangements and security of supply, solutions can be found."

The EU official said the two sides are holding "regular exchanges" on energy security ahead of the winter.

Meanwhile, Britain's continued exclusion from the North Sea Energy Cooperation platform baffles industry representatives, who cannot understand why it is taking so long for the U.K. to join a group of governments that also includes non-EU member Norway.

The EU official again rejected the claim that the Commission was obstructing Britain's readmission, insisting that "work is ongoing" on a memorandum of understanding to allow the U.K. back in the NSEC meetings. The MoU would need to be endorsed by the Council.

"There is no freeze. There has been recent progress in the discussions at technical level and the Commission will soon be able to initiate the adoption procedure of the memorandum of understanding formalizing the cooperation between the EU and NSEC," the official said.

At a meeting on September 12, energy ministers from NSEC member countries acknowledged the "urgency of action" created by Russia's invasion of Ukraine, and welcomed "recent progress" in discussions for the MoU with Britain.

"Cognisant of the mutual benefits of enhanced future cooperation, ministers and the [energy] commissioner [Kadri Simson] look forward to a final agreement on the memorandum of understanding," a readout of the Dublin meeting stated.

"This will be contingent on a successful conclusion to the discussions between the Commission and the U.K."

Source: POLITICO

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Devin

Trickledown economics was highly fashionable on the political right in the 1980s, when both Ronald Reagan in the US and Margaret Thatcher championed the idea. It resurfaced in America under both George W Bush and Donald Trump, and it is now undergoing a revival in Britain under the new prime minister, Liz Truss.

The theory of trickledown economics is simple. Governments should cut taxes for the better off and for corporations because that is the key to securing faster growth. Entrepreneurs are more likely to start and expand businesses, companies are more inclined to invest and banks will tend to increase lending if they are paying less in tax.

Initially, the beneficiaries are the rich, but gradually everyone gains because as the economy gets bigger well-paid jobs are created for working people. Governments should stop focusing on how the economic pie is distributed and focus on growing the pie instead.

Supporters of trickle down often cite the work of the US economist Arthur Laffer as proof that the theory works. Laffer said tax cuts for the wealthy had a powerful multiplier effect and any revenues lost by governments from reducing tax rates would be more than compensated for by the fruits of higher growth.

Truss is using this argument to justify the £30bn of tax cuts to be announced in Kwasi Kwarteng's mini budget on Friday, even though Laffer was clear his theory worked best when personal tax rates were prohibitively high, by which he meant between 50% and 100%. At rates below 50%, Laffer found cutting taxes led to bigger rather than smaller budget deficits.

In practice, trickle down did not go according to plan. Reagan and Bush slashed tax on higher earners but inequality soared: between 1979 and 2005 the incomes of the Top 1% of earners tripled while those of the bottom 20% rose by just 6%. It was more a case of trickle up than trickle down.

Moreover, Reagan's combination of tax cuts for the rich and a big increase in defence spending resulted in a threefold increase in US federal government debt between 1981 and 1989. The US economy grew strongly in the latter years of Reagan's presidency, but this was a period not just of higher spending on the military but also of cheaper borrowing after the cripplingly high interest rates of the early 1980s.

In a 2015 assessment, the International Monetary Fund rubbished trickle down and said governments should instead focus on policies that would directly help those on low and middle incomes.

"We find that increasing the income share of the poor and the middle class actually increases growth while a rising income share of the Top 20% results in lower growth – that is, when the rich get richer, benefits do not trickle down," the IMF said. "This suggests that policies need to be country specific but should focus on raising the income share of the poor, and ensuring there is no hollowing out of the middle class."

Source: The Guardian

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Kevin Du

Cryptocurrency markets recently experienced a spectacular crash, with total market capitalisation falling from about $3 trillion to just below $1tn today.

This is not an unprecedented situation in cryptocurrencies — we witnessed a similar event in 2018.

Back then, Bitcoin's value collapsed by more than 80 per cent following a breathtaking rally that saw its price rise from $900 to around $20,000, making some of the early adopters millionaires and billionaires in the space of only a year.

During that time, the cryptocurrency market was establishing itself as a serious player in the financial ecosystem, so much so that Bitcoin attracted the attention of regulators, particularly in the US and China. This led to its famous crash of 2018 amid fears that central bank scrutiny would stifle the burgeoning cryptocurrency industry.

As we all know, however, Bitcoin was far from dead.

The birth of decentralised finance

Over the 18 months that preceded the most recent cryptocurrency crash, we saw the cryptocurrency industry coming of age.

An incredible amount of development took place that eventually led to the establishment of the decentralised financial network and the 2020 boom.

Decentralised finance, commonly known as DeFi, was born in 2019 when a handful of organisations sought to challenge the status quo in financial services.

Their goal was to democratise finance, facilitating peer-to-peer lending, banking and investment services without the need for a centralised intermediary.

Transparency and financial inclusion were the slogans on the banners of this revolution.

The popularity of this idea quickly propelled the DeFi sector to dizzying heights. In December 2021, the total value locked in DeFi protocols — an indicator of the size of this market segment — stood at $247.96 billion.

Today, this value has dropped to $56.27bn, while the price of Bitcoin has plummeted more than 70 per cent from its all-time high of $68,000.

The coming boom

As history has shown, though, it is only a matter of time until the next period of development arrives. This time, it will be greater than anything we have witnessed so far.

This year's cryptocurrency crash has taught the industry important lessons. The most important of these is that bringing traditional, centralised financial practices on to the blockchain simply doesn't work.

Lessons from the great financial crisis

Former billion-dollar giants such as Celsius and Voyager Digital marketed themselves as crypto banks, empowering people to take their financial futures into their own hands.

However, while Celsius was calling for its customers to "unbank" themselves, in reality they were simply swapping one type of centralised control for another.

As unsecured lenders, customers who chose to earn interest on their cryptocurrencies through Celsius never became custodians of their own assets. They relinquished control in exchange for an attractive annual return, in the erroneous belief that their funds would be safe.

In a similar way to the 2008 great financial crisis, this system worked until it did not — and then it failed spectacularly.

The demise of these crypto banks was little different from the fall of Lehman Brothers back in 2008. Excessive leverage and risk-taking was followed by a liquidity crisis and a domino effect across the market.

Power to the people

This is precisely why the crypto industry can't follow the route of traditional finance. A different, fair financial system cannot be built on the principles that govern a broken paradigm.

DeFi is all about giving the power back to the people. This means no longer relinquishing ownership of their assets. This means transparency. This means financial inclusion.

Although DeFi has certainly suffered in volume from the contagion in the crypto market, the protocols worked well in the slump.

The next 18 months will see a true renaissance of this sector. DeFi will go back to its roots and build a decentralised network that can provide a true alternative to the current elitist, exclusive and inaccessible global financial system.

True decentralisation

In a decentralised economy, it won't matter where people live, what their credit score is, or how rampant inflation is in their country. Financial freedom will be available to all through a secure blockchain at the click of a button.

Traditionally, cryptocurrency downturns are a chance for the industry to take a breather and prepare for the next boom cycle.

The preparation that is taking place behind the scenes in the DeFi space today dwarfs the development that has happened in cryptocurrencies in previous years.

What we will see at the end of it will be a true democratisation of finance, the way it was supposed to be from the beginning.

Source: The National News

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Devin

European shares traded in a narrow range on Wednesday as investors digested Russia's first mobilisation since World War Two while they waited for the U.S. Federal Reserve's likely third straight jumbo-sized interest rate hike later in the day.

The continent-wide STOXX 600 index was 0.1% higher, bouncing back after hitting its lowest level since early July.

A 0.7% decline in the rate-sensitive technology sector index was offset by gains in energy stocks and miners. The indexes rose about 1.5% each as oil and other commodity prices climbed following the news of mobilisation.

Gains in defence stocks also offered some support. Rheinmetall, Leonardo, Thales and BAE Systems jumped between 5.1% and 7.0%.

President Vladimir Putin ordered a partial mobilisation of Russia's 2 million-strong military reserves, in a significant escalation of the conflict in Ukraine.

The mobilisation amplified concerns over the conflict that has raised the possibility of power rationing and potential blackouts during winter after Russia abruptly turned off the taps on a main natural gas pipeline to the region.

Germany's DAX index clocked the most declines among its continental peers, down 0.5%, as Europe's economic powerhouse is reliant on Russia for energy supplies.

Highlighting that dependence, Germany confirmed the nationalisation of Uniper, the country's largest importer of Russian gas, as it scrambles to secure non-Russian sources of power. The company's shares were down about 19%.

"The volatility in prices would also cause a knock on effect for the manufacturing industry, particularly in Germany because there are worries that there could be blackouts and energy restrictions and that could further damage and weaken economies which are already pretty fragile," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

The Fed is seen raising its benchmark lending rate by 75 basis points (bps) later in the day, continuing its aggressive fight against persistently high inflation. Some traders also expect the U.S. central bank to increase rates by a full percentage point.

"The 75 bps hike is priced in at this stage but where it gets interesting, is what's the terminal rate going to be?," said Giles Coghlan, chief market analyst, HYCM.

"The market wants to see if the Fed is going to say we're actually in a bit of a stickier situation than we thought so we're going to have to be more aggressive than you have been expecting."

Fortum shares surged 14.6% to the top of the STOXX 600, after Germany agreed to nationalise Uniper by buying the Finnish firm's stake.

Source: Reuters

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Devin

One of the few bits of British domestic news to break through our national mourning following the death of Queen Elizabeth was that later this week we will have what the government calls a "fiscal event".

It sounds alarming. A "cardiac event" is what most of us would call a heart attack. I wondered if a "fiscal event" might mean something similar. Perhaps the entire British economy was about to have a life-changing seizure. Given the way things have gone in recent months – Boris Johnson's scandals, major government changes, and all kinds of other bad news – the British people have come to expect the worst.

But the "fiscal event" turns out to be just a new label on an old habit, an emergency mini-budget on Friday. The new Chancellor of the Exchequer, Kwasi Kwarteng, will make public his plans to help people through a hard winter faced with rising bills and unrelentingly bad economic news. Annual inflation is about 10 per cent. Interest rates are up and predicted to rise further, and perhaps my initial fear that the UK is suffering some kind of economic heart attack is not far from the truth.

Will the UK Government's 'Fiscal Event' Provide Respite to Ordinary Britons?_1

The pound remains at a 37-year low against the US dollar. Economists suggest we may be in a recession. The UK imports a great deal of fuel, food, cars and other goods priced in dollars or euros, so a weak pound contributes to higher prices in our shops and increased transport costs, too. Worse, many businesses are in trouble, with impossible energy bills and soaring costs of raw materials. Mr. Kwarteng's "fiscal event" needs to ensure that the UK does not face a swathe of business bankruptcies this winter.

There also emerged a stunning report in the Financial Times based on their analysis of statistical evidence about wage inequality. The study shows that many British people enjoy an excellent standard of living, as you would expect in one of the world's richest countries, but this is very uneven. The top 3 per cent of earners take home roughly £84,000 ($95,600) a year after tax, but the lowest-earning bracket of British households "had a standard of living that was 20 per cent weaker than their counterparts in Slovenia". The poorest people in Ireland – for years a symbol of poverty – now have a standard of living considerably higher than the poorest in the UK. And Britain's poorest inevitably will be hurt most by the economic downturn unless Mr. Kwarteng's "fiscal event" has some bold new ideas.

The guidance from UK Treasury sources is that he is considering removing the cap on banker's bonuses. The cap meant that no bonus should be more than twice the average banker's salary. It was imposed when the UK was still in the EU, after the 2008 financial crisis, as an attempt to stop risky practices that contributed to the crash. Mr. Kwarteng apparently thinks ending the cap will revive the UK as an attractive financial centre, when in recent years we have lost out to Paris, Amsterdam, Frankfurt and elsewhere. Treasury sources suggest this will be "Big Bang 2.0", a reference to the original "Big Bang" in the 1980s when former prime minister Margaret Thatcher changed the rules and scrapped some of the bureaucracy that held the City of London back.

Unfortunately with bankers' bonuses, Mr. Kwarteng's idea of Big Bang 2.0 is a damp squib. Britain has lost talent, trade and investment but not because of bonuses. It's because of Brexit. Goldman Sachs made that clear when the Brexit vote meant that it moved talent and business from the UK to Germany. Brexit is also why British exports to the EU fell by 33 per cent from 2020 to 2021. Michelle Dale, a senior manager at accountancy firm UHY Hacker Young, said the reason was the difficult new bureaucracy involved in exporting to the EU and "businesses are not getting enough support from the government to navigate the post-Brexit trading minefield".

There's no doubt that if the cap on bankers' bonuses is removed, Mr. Kwarteng will argue that that's a post-Brexit benefit, although it cannot compensate for all the Brexit losses. It's also politically tone deaf. Imagine that you are one of millions of British low-paid workers whose standard of living is lower than that of Slovenia or Ireland. You learn that one of the first significant acts by the new Liz Truss government is to reward top bankers – people already on six-figure salaries. You, meanwhile, worry if you can afford both heating and eating this winter.

In 1834, the British Poor Law drew a distinction between the deserving poor, hardworking people who needed help, and the undeserving poor on whom charity was wasted. Rewarding bankers, hardworking or otherwise, and treating them as if they are the deserving rich is simply bizarre.

If Mr. Kwarteng and Ms Truss think that's the answer to Britain's economic problems, they are likely to have the shortest political honeymoon in the country's history. Their "fiscal event" really could be heart-stoppingly misjudged.