Currencies, Commodities Stronger After Fed Official Suggests Rate Hike Delay

Foreign currencies and commodities were up sharply on Monday, boosted by remarks from one Federal Reserve official suggesting a September interest rate hike may not be a done deal. Comments from Federal Reserve Vice Chairman Stanley Fischer pressured the U.S. Dollar, leading to a surge by gold, the Euro and British Pound.

Fischer told Bloomberg TV that he doesn’t expect the first rate hike by the U.S. central bank since 2006 to occur until after inflation returns closer to the Fed’s target of around 2%. The inflation rate has dipped close to zero in recent months and hasn’t been above 2% since April 2012.

Currency and commodity markets were pretty resilient today even after Atlanta Fed president Dennis Lockhart said the economy is strong enough to handle a gradual rise in interest rates. Last week, his comments underpinned the U.S. Dollar after he said he supported a September rate hike. Lockhart also said last week in a Wall Street Journal interview that U.S. economic data would need to deteriorate sharply to prevent the Fed from raising rates in September.

Investors paid close attention to the comments from the Fed members today because there’s little important U.S. economic data this week. The comments also suggest that the Fed may be far from raising rates, putting a rate hike in September in jeopardy. After last week’s U.S. Non-Farm Payrolls report, traders raised the odds of an early rate hike from 47% to 55% with a December hike coming in at 100%. After today’s news, the odds of a September rate hike probably shifted back to below 50%.

An early rate hike hasn’t been eliminated because consumer inflation hasn’t been reported this month. However, the odds of it moving closer to 2% may be pretty low because of the steep drop in energy prices in July. Additionally, the central bank will get another chance to look at the labor market figures before its next meeting in mid-September.

December Gold prices rallied back over the $1100.00 level after the sell-off in the U.S. Dollar. The weaker Greenback also encouraged profit-taking by crude oil traders. This market reached a new low for the year earlier in the session.

The EUR/USD reached its highest level in more than a week and the GBP/USD rebounded after its recent sell-off. These moves were attributed to position-squaring and short-covering.