Today's Edition
KHALED AL KHAWALDEH (ABU DHABI)
UAE and Gulf markets are anticipating a much-anticipated cut in interest rates following the US Central Bank’s Open Market Committee meeting on Tuesday and Wednesday.
According to Ranim Turfa, a Market Analyst at the global digital trading brokerage Axi, Gulf markets stand to benefit significantly from a cut in interest rates and the devaluation of the dollar.
“Markets are closely watching the Federal Reserve’s decision set to be announced on Wednesday, July 31. It is expected that the Fed will maintain interest rates at 5.50%. However, the key focus will be on the press conference held by Fed Chair Jerome Powell. Markets will be attentive to Powell’s signals regarding future interest rate changes, inflation, and economic growth,” she told Aletihad on Tuesday.
“According to recent data, US inflation has been declining, and there is notable weakness in the labour market. These factors might prompt the Fed to consider further rate cuts. Should this scenario unfold, it would likely have a negative impact on the US dollar. A weaker dollar could lead to higher global oil prices, since oil is priced in USD. This situation could benefit oil-exporting countries in the Middle East, such as Saudi Arabia and the UAE, and enhance their positions in global markets.”
Monetary policy in the GCC is heavily impacted by the US Federal Reserve’s decisions, as most currencies are pegged to the US dollar, fixing them to the price of the USD and exposing economies to fluctuations in US economic conditions. The UAE dirham (Dh) has been pegged to the US dollar (USD) since 1997, at an exchange rate of approximately Dh3.67 to $1.
On Monday, markets in the UAE and the region rose on the back of an expected rate cut, with the Abu Dhabi Securities Exchange (ADX) main index finishing 0.8% higher, led by a 6.3% rise in the country’s biggest lender, First Abu Dhabi Bank (FAB).
“Additionally, a lower dollar may make US assets less attractive, potentially redirecting investments towards emerging markets, including those in the Middle East. This possible influx of investment could provide a significant boost to regional economies and foster growth,” Turfa said.
In March of this year, the UAE central bank followed the Federal Reserve in holding interest rates due to higher-than-expected inflation. A continuation of this trend is likely to maintain a strong US dollar, which Turfa said may inadvertently impact Gulf markets.
“On the other hand, if Powell indicates that inflation remains high and the Fed needs more economic data before deciding on rate cuts, it would be positive for the US dollar. A stronger dollar would make US assets more attractive and could lead to a decline in foreign investments in Middle Eastern markets.”
