• FOMC statement suggest a rate hike
  • Some analysts see parity for EUR-USD
  • The pound dips on a “no rush” statement
  • The loonie falls with oil prices

The US dollar gained after the release of Federal Open Market Committee (FOMC) statement yesterday.  The Fed’s statement did not change much from the previous version, but it did note that the economy is enjoying a “solid” instead of “moderate” pace of growth and low inflation is expected to be transitory.  The Fed expects the inflation rate to remain restrained for some time but rise to a target rate of 2 percent once energy prices reverse.

The committee also reiterated its previous policy stance of being “patient” but added this time that it will be watching out for the effects of “international” factors such as lower oil prices, slowing economies and a stronger dollar before raising the interest rates.

Immediately, market participants parsed the statement to look for what they would like to see.  Some saw the statement in a dovish light and speculated that the Fed is in no hurry to raise rates this year.  Many others deemed the statement as hawkish, and asserted that the Fed will raise the rates as early as June as the economy continued to expand solidly.

These differing interpretations explain why the initial market reaction was confusing yesterday.  The dollar gyrated until it made up its mind late in the afternoon trading hours to settle higher against the major currencies on a comprised view the that the Fed will be raising the rates perhaps late in the year. This is in contrast to the other central banks, including the Bank of Japan and the European Central Bank who are expected to keep their short term rates near zero to battle deflation and growth stagnation.

In conclusion, the US economy does indeed stand out as a shining beacon. And this Friday’s 4th quarter Gross Domestic Product report may further affirm this outlook.

jan-29 graph

EUR-USD fell below 1.3000 overnight as the FOMC statement supported a market view that the US economy is expected to further outperform the Eurozone this year.  Some analysts now see an eventual move to parity within the next 18 months.  The January German Employment will be released this morning.

GBP-USD dipped below 1.5200 and remains under pressure after the Bank of England Chief Economist, Andrew Haldane said during an interview that there is “no rush” to hike rates.  The market consensus is the bank will wait until early 2016 before ending its bond buying program and start normalizing the interest rates.

USD-CAD climbed higher and broke through 1.2500 this morning.  This move came in concert with crude oil prices dipping to fresh trend lows.

AUD-USD fell again in Asian trading to .7900, and it is poised to go lower.  The 4th quarter consumer prices data came in below the market expectations, fueling a growing expectation that the Reserve Bank of Australia will cut the short term interest rates on February 3rd.

Have a great day.