US Dollar soars against its peers following Federal Reserve interest rate hike
21/Dec/2015 • Currency Updates•
The Federal Reserve in the US lived up to expectations last week when it raised the overnight rate by 0.25% for the first time since 2006.
The modestly hawkish communications that accompanied the move buoyed the US currency. The Dollar appears to have resumed its gradual uptrend, which it has been following over the past few weeks.
The reaction in other markets was somewhat contradictory: Treasury yields ended the week lower, as did equities, but commodities rallied somewhat and appeared to be putting in some kind of a short-term bottom around recent levels.
As we’re now entering the traditionally quiet Christmas period, we continue to expect a gradual Dollar rally into 2016 and the Euro at parity sometime in spring.
Major currencies in detail
Last week saw the release of key economic data in the UK, and the outcomes were decidedly mixed.
While inflation data came in more or less as expected, with core inflation, which strips out volatile components, edging up from 1.1% to 1.2% on the year, the labour market delivered yet another drop in the unemployment rate, to 5.2%, but lower slack is failing to show up in increased wage pressures.
In fact, ex-bonuses, weekly earnings rose just 2% annualised in the three months to October, down from the 2.4% the previous month. This is perhaps the key indicator that the Bank of England is focusing on deciding when and how fast to hike rates. The lacklustre October number makes us even more comfortable in our call that this will not happen until the third quarter of next year.
A spate of macroeconomic data in the Eurozone did not shed much light on the near-term prospects for the economy, and was deservedly overshadowed by the Federal Reserve meeting across the Atlantic.
Industrial production surprised to the upside, but the previous month’s number was revised down and the net result was a wash. Core inflation remained unchanged at 0.9% on the year, while the headline number dipped below zero again. It’s likely to stay negative for quite a few months, as the crash in oil prices and commodities in general will be filtering through to consumer prices.
The European Central Bank is unlikely to let up its bond purchasing efforts, so we forecast expectations on further monetary stimulus to build up in the coming months, which will keep the Euro under steady downward pressure.
As almost universally expected, the Fed hiked rates by 0.25% last Wednesday. Overall, the US central bank went out of its way to avoid surprises but the message from the Fed’s statement, its expectations and Chair Janet Yellen’s press conference were all on balance modestly hawkish.
The key “dot plot”, with the individual FOMC members’ expectations in terms of where interest rates will be in the future, remained unchanged from September, suggesting that the Fed still expects to hike once a quarter or roughly at every other meeting. This is exactly in line with our expectations but faster than the market is pricing in. Also, the vote was unanimous – no voters called to keep rates unchanged, which means that there will be limited opposition to further hikes as long as the US labour market maintains its current pace of job creation.
Overall, the decision, statement and forecasts were supportive of our expectations for the further gradual appreciation of the Dollar against all major currencies.
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