Fed Lifts Rates, US Dollar Weakens

The US Federal Reserve, in their latest board meeting last week raised interest rates for the third time since the global financial crisis bringing the figure to 1.00 percent and in what should have been a boom for the US dollar turned out to be a bust and the question is why?

The dollar had gained significantly against all of the major currencies in the lead up to before the interest rate decision as traders positioned themselves to take advantage of higher rates in the US as well as a higher yielding currency.

The USA is the only economy in the world at the moment in a position to lift interest rates, whereas countries such as Australia will probably need to cut rates to kick start the economy.

Although there was a tightening of monetary policy, what failed to eventuate was a hawkish speech from the Fed President Janet Yellen, which left investors guessing, how many more rate hikes will there be this year?

“The simple message is, the economy is doing well, the unemployment rate has moved way down and many more people are feeling more optimistic about their labor prospects.” Federal Reserve Chair Janet Yellen noted at a news conference following the interest rate decision.

Before the rate hike decision, the market had prices in 3 or maybe 4 rate hikes this year but were left feeling unsure after Janet Yellen’s speech where she noted that although she expected further rate rises this year (maybe 2), the Fed would monitor economic data which and will play heavily in their decisions.

“In the official statement and at chair Janet Yellen’s press conference the Fed stressed continuity with its previous stance, and maintained guidance for two more hikes this year,” noted CMC Markets chief market strategist Michael McCarthy.

“Expectations are that the Fed would lift its economic estimates in light of the new administration were dashed. This confounded those expecting a more hawkish stance, and saw an immediately sell down of the US dollar.” he added.

There may have been an overreaction after the rate decision on the part of  the US dollar, and with uncertainty surrounding in the upcoming European elections as well as Brexit in the UK, the pullback in the greenback may be short lived.

The review was prepared by FIBO Group analyst Andrew Masters.