The Federal Reserve, the world’s most powerful central bank, is set to raise interest rates overnight and signal that another rise is planned for later in 2017. The headline looks almost certain to be another 25 basis point increase to 1.25%. A third hike in 7 months shows that the US monetary policy committee is well and truly awake after lying dormant for the whole of 2016.
As with the last move from the Fed the FX market began to price the hike in so analysts do not expect too much strength from the USD based on this alone. What is likely to cause ripples through the market is the prognosis from Chair Yellen regarding future rate rises this year and next. The sentiment around this is polarized.
The position to base any predictions stems from the ‘dot plot’ graph which was last updated by the Fed in March. This anticipated a further 2 25bp increases in 2017 and 3 in 2018 leaving the US with a policy set at 3% by Q1 2019. Markets, however remain unconvinced that this is a realistic target so much so that current predictions expect rates to rise only once more by the end of 2018.
The likelihood of the Fed conceding to market analysts is uncertain at present. Looking at the hard data, the jobless claims and fall in unemployment rate drives the assertion for continued hikes. However, inflation has not yet surpassed the level necessary for central bank intervention. CPI has fallen below 2% for the first time since 2015 with modest rises on the horizon.
Should the Fed continue to carry on its projected path expect USD strength, however if the sentiment is cautious and monetary policy tightening is suspended the USD will inevitably be under pressure.
A weaker Dollar: Trump vs. Powell The Dollar continued to lose ground yesterday as the truce between Israel and Iran appeared to continue to hold. There has been a noticeable return to focus upon macro and monetary influences in major currency pairs. Yesterday, Fed Chair Jay Powell provided his semi-annual monetary policy report before the […]
Next level EURUSD has managed a relatively smooth ascent to its current levels, around 1.18. That is despite significant resistance levels, most notably around 1.17. A large collection of option strike prices gathered around this key level and the price history of the pair shows us its significance. Sustained closes above this level since last […]
Whiplash A highly volatile start to yesterday’s trading session saw a flight to safety in markets. Despite the Dollar having lost much of its appeal as a safe haven lately, there was still an identifiable USD bid prior to and during the European open. We have identified recently how markets have clearly differentiated between general […]