Dollar Trades Mixed after Fed’s Funds Rates Hike
The US dollar was mixed against its major trading partners early Thursday after the Federal Open Market Committee decided to raise rates by 75 basis points, as expected, but was noncommittal on how it would proceed going forward as recession fears build.
The Fed on Wednesday raised rates by 75 basis points, as expected, before leaving as many doors open as possible for September. Chair Powell and his colleagues went for a cocktail of hawkish data dependency with a dovish twist. It doesn’t take a genius to work out which part investors lapped up.
Minimal market reaction to the 75bp hike. If anything inflation breakeven were a tad higher, but not much in it. Nominal rates are seeing little change in terms of impact effect. But the lead up to this has seen market rates fall, calming inflation expectations, pushing towards delivering on what was expected and no more.
Meanwhile, the 5yr continues to richen to the curve, strengthening the turning point story for market rates, having set that peak at 3.5% for the 10yr a little over a month ago.
Markets appear to have read the overall FOMC message as dovish despite insistence by Federal Reserve Chair Jerome Powell that larger-than-normal rate increases may be needed and that panel has the tools and resolve to do what is needed to fight inflation.
However, with a 3% to 3.5% federal funds rate level seen for the end of 2022 by the FOMC’s June Summary of Economic Projections, only about 50-100 basis points above the current level, the committee would need to slow its pace of rate increases over the remaining three meetings even if a recession does not appear.
The US yield curve is under flattening pressure now as the Fed continues to hike. A quick summary of foreign exchange activity heading into Thursday shows that USDEUR slipped to 1.0135 from 1.0199 at the Wednesday US close and was modestly below the 1.0152 level at the same point Wednesday morning.
The pair surged immediately after the FOMC announcement but slipped overnight. EU consumer confidence fell further in July according to data released earlier Thursday. READ: Dollar Gives up Early Gain ahead of Fed’s Minutes
Other data showed a surge in French industrial prices, higher retail sales and lower unemployment in Spain, and an increase in Italian industrial sales. German CPI is scheduled to be released today. The next meeting European Central Bank meeting is scheduled for Sept. 9.
GBPUSD fell to 1.2115 from 1.2157 at the Wednesday US close but remained above the 1.2072 level at the same time Wednesday morning. Like the euro, the pound got a lift after the FOMC meeting but was unable to sustain it entirely.
There are no UK data scheduled for release on Thursday. The Bank of England meets next on Aug. 4, when it is expected to continue its tightening cycle with the possibility of a larger 50-basis point increase.
USDJPY fell to 135.6222 from 136.6122 at the Wednesday US close and 136.6835 at the same point Wednesday morning before the FOMC. There were no key Japanese data scheduled for release on Thursday. No change to monetary policy is expected at the next Bank of Japan meeting on Sept. 21-22, especially if cases of COVID-19 rebound.
USDCAD rose slightly to 1.2831 from 1.2824 at the Wednesday US close but was well below the 1.2855 level at the same point Wednesday morning, reflecting a large decline after the FOMC announcement. There are no Canadian data scheduled for release on Thursday. The Bank of Canada’s monetary policy committee meets next on Sept. 7. # Dollar Trades Mixed after Fed’s Funds Rates Hike
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