The Federal Reserve hiked the discount rate 25 basis points
to 75 basis points late Thursday, sending the U.S. Dollar sharply higher. This
buying spree spilled over into the overnight trade pushing the Dollar Index
closer to the all-important major 50% level at 82.63.
The discount rate hike by the Fed was implemented to
encourage banks to borrow more from the private sector. This move does not
reflect a change in monetary policy despite market reactions and analyst
commentaries to the contrary.Some have
interpreted the action by the Fed as a move towards monetary-policy
normalization although the Fed insists this is not the case. As far as the Fed
is concerned, its official statement is that interest rates will remain low for
an â€śextended periodâ€ť.
What it could mean is that the Fed is comfortable enough to
begin hiking rates although it is not a change in monetary policy. In addition,
I think it sends a clear signal that the emergency supply of liquidity that helped
fund the economic recovery is done. It could also be interpreted as a
psychological move by the Fed for investors to get ready for the future course
of monetary policy.This action by the
Fed is basically signaling that future rates are more likely to go up, rather
than stabilize or go down.
Some are calling the move by the Fed a surprise.The timing may have been a surprise, but a
discount rate hike was mentioned twice by the Fed during the last two weeks. In
Bernankeâ€™s testimony to Congress on February 10th, he said the discount rate
would have to be raised â€śbefore longâ€ť.The
FOMC minutes released on February 17th stated that a discount rate hike â€śwould
soon be appropriateâ€ť. As far as the timing is concerned, it looks as if the Fed
wanted to separate the hike from its normal FOMC activities in order to
emphasize that this hike was not a change in monetary policy.
The EUR USD plunged following the discount rate hike. The
Euro is now taking hits from the improving U.S.
economy, Fed activity and concerns about Greece sovereign debt.Activity in the Greek financial markets is
indicating the country may not be able to borrow unless it receives backing
from the European Union. Technically, the Euro is currently testing a major .618
retracement level at 1.3483.
Overnight the GBP USD broke through support at 1.5534,
taking the market to a 9-month low.The
catalyst behind the break is the discount rate hike by the Fed and fiscal
concerns. Investors are worried that the U.K.
economy is falling too far behind the U.S. economy. Some feel the Bank of
England is well behind the Fed. This is probably true as the Fed is beginning
to withdraw stimulus measures while the BoE is still considering additional
quantitative easing moves. At this time, the charts are indicating that
downside risks are increasing.Overnight, U.K.
retail sales fell more than expected.This is a sign of weak consumer demand.
The USD JPY is trading higher. The discount rate hike by the
Fed took away Japanâ€™s
short-term interest rate advantage over the Dollar. This means the Yen is
likely to become the preferred funding currency for carry trades.
The weaker Euro is triggering a strong rally in the USD
CHF.Traders are selling the Swiss Franc
in anticipation of more intervention activity by the Swiss National Bank.
The rise in the Dollar triggered by the Fedâ€™s discount rate
hike is putting pressure on commodities such as gold and crude oil.This is triggering a sell-off in
commodity-linked currencies such as the Canadian Dollar, Australian Dollar and
New Zealand Dollar. In addition, the Aussie and the Kiwi are feeling pressure
because the rate hike weakened their yield advantage.
Although the Forex markets are reacting as if the Fed is
tightening its monetary policy, the Fed insists it is still on course to keep
interest rates low for an â€śextended periodâ€ť. According to Fed Bank of St. Louis President James Bullard, speculation that
interest rates will rise this year are â€śoverblownâ€ť.This could mean the rally in the Dollar may
be an overreaction. Donâ€™t be surprised if the Dollar gives back some of its
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Mon 10 Sep 2018 AA 08:30 GB- GDP, Trade, Output Tue 11 Sep 2018 AA 08:30 GB- Employment Decision A 09:00 DE- ZEW Survey Wed 12 Sep 2018 A 12:30 US- PPI A 14:30 US- EIA Crude A 18:00 US- Beige Book Thu 13 Sep 2018 A 1:30 AU- Employment AA 11:00 GB- Bank of England Decision AA 11:45 EZ- European Central Bank Decision A 12:30 US- Weekly Jobless AA 12:30 US- CPI Fri 14 Sep 2018 A 08:30 GB- GDP AA 12:30 US- Retail Sales A 13:15 US- Industrial Production AA 14:00 US- prelim University of Michigan
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