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Banking stocks likely to benefit as Fed highlights hawkish rate stance

The Federal Open Market Committee (FOMC) has highlighted how rising inflation could soon impact rates, with banks looking appealing as a result.

Banks should benefit as Fed takes inflation more seriously

This week’s Federal Reserve (Fed) meeting provided a surprisingly hawkish take from Powell & Co, with the median dot plot mapping out a potential two rate hikes in 2023. With inflation on the rise of late, the key question had been over just how long Fed members would view it as transitory rather than persistent. The jump in projections for 2021 inflation highlights the fact that members are clearly becoming aware that this recent rise in prices may not be as fleeting as they had predicted. They also brought improved growth forecasts, which served to signal a potential sweet spot for the banking sector going forward. The procyclical nature of the financial sector does highlight how stocks within the sector are likely to outperform during times of worries around rising interest rates. Improved economic readings and monetary tightening do seem likely to persist as topics moving forward, while the prospect of increased government spending in the US coupled with the alleviation of Brexit fears call for optimism on either side of the Atlantic.

Bank of America

A major holding for Warren Buffet, Bank of America shares appeal to those looking for exposure to the US economy. The stock has dropped back below trendline support of late, with price falling into the prior high of $40.78. The respect of that level does highlight the potential to push higher from here, with a breakdown below that support level required to bring about expectations of a more protracted move lower. Should that occur, a break down towards the deep Fibonacci zone ($38.72-39.63) would be likely. Whether we see that near-term retracement or not, there is a good chance we will soon see the stock push higher once again.

Lloyds Banking Group

Lloyds has also been drifting lower of late, with the decline in yields denting sentiment for the sector. Nonetheless, this stock remains on an upward trend that is likely to persist as the economy picks up steam. With UK inflation above target after a reading of 2.1% on Wednesday, there is a good chance that the Bank of England (BoE) will also start to build towards a more hawkish tone like that seen in the US. With that in mind, Lloyds is expected to rise further as we go forward, with a bullish outlook in play unless price breaks below the 41p low.

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