Advertisement
Advertisement

Why the US Dollar Falls after Fed’s Rate Hike?

By:
Mohamed Fathalla
Updated: Mar 16, 2017, 10:15 UTC

Immediately after the interest rate decision was released, the US Dollar tumbled and US stocks soared. Sounds weird to you?

Why the US Dollar Falls after Fed’s Rate Hike?

Immediately after the interest rate decision was released, the US Dollar tumbled and US stocks soared. Sounds weird to you? Currently, It’s seems as if markets push the dollar down in any economic result. obviously, markets priced in the expected rate hike, however, the US dollar leads the race before other currencies to higher interest rates.

I would like to point out that this case is found in the market couple of weeks ago. After the last US employment data showed better than expected numbers for both NFP and unemployment rate, EUR/USD climbed. Second similar action approved this form after ECB released its interest rates decision on March 9th. The decision hold no change and even no news from Mr. Draghi’s speech, however, the Euro pairs soared as if the ECB raised its rates. There are some fundamental reasons and technical indications towards that.

The Federal Reserve decided to raise its interest rate benchmark by 25 basis points from 0.75% to 1.00%. Janet Yellen speech holds many hawkish and strengthens point on the US economy, as rise in households spending and the most important point regarding inflation during the last quarters which reached the target of 2%.

The most significant part of her speech relates to the probability of the foreseeable raises in the interest rates “on a moderate pace” as she mentioned. According to Jeff Cox of CNBC, expectations are for two rate hikes later on this year, first on June and the second on December.

Behind The Scene, What Happened to The Markets? SWAPS!

In some of our previous analysis we motioned the influence on FOREX market by SWAPS deals. Swaps are a real under table or as I prefer to label it “the legal black market”. An increase in deals made by Bank of Japan and other speculators on USD in the form of SWAP agreements, especially on the raising fears in Europe due to the Greece financial crisis and the consecutive elections. Add to those speculations against oil due to some bad news coming out of OPEC upon the non-commitment by the productions cut deal. Such kind of circumstances leads the market previous two months to the conduct of consolidation and irrational movements

Another point was raised by one of the journalists in the press conference, which is the foreseeable imposed tax on US imports that will lead to the decreasing demand on dollar in case it was applied. Discussing that point may have heavy shadows to the USD price drop. As that point, it is ambiguous to get a keen result about it, Misses Yellen herself couldn’t answer the Journalist question.

Markets Reaction

The absolute reaction to the latest rate hike  has pushed further global share market, except for the insurance sector. EUR/USD soared once the interest rates announced. As we clarified before, swaps deals pushed the dollar higher as these overbought dollar contracts must be covered.

EUR/USD rose to 1.0707, 100 pips, consolidates for the rest of the day. I am expecting the pair to continue higher as the pair previously tested unbreakable support level. Next resistant level is 1.0825

EUR/USD Daily Chart
EUR/USD Daily Chart

USD/JPY is also likely to direct upwards with some little consolidation.

USD/JPY Daily Chart
USD/JPY Daily Chart

Significant rise in volume in the next days may lead to a great enhancement in the FOREX market. Euro reacted indecisively as the current prime minister on Netherlands seemed to be the winner.

About the Author

Mohamed Fathallacontributor

Did you find this article useful?

Advertisement