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Fed rate hike: to be or not to be?

Last week was marked by a U-turn in expectations regarding the timing of a rate hike by the US Fed. Based on futures quotes, the probability of a rate hike in March has risen over the course of a week from 40% to 80%. This rise was facilitated by comments made by a host of FOMC members. The need for a faster tightening of fiscal policy was made clear by both Dudley and Williams. The hawk camp was bolstered by Lael Brainard, as she echoed the need to act now to prevent future complications. Comments from Janet Yellen on Friday further convinced market participants: "Indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate."

This week, the currency market will be holding its breath on the Fed meeting set to take place on the 14-15th of March. There will be particular attention given to Friday's US labour market report for February, which will detail employment figures outside the agricultural sector. To many, this dataset will be key to the Fed's interest rate decision. In our view, the dollar is set to make some gains against other currencies in the next few days. The immediate target for the EUR/USD pair is around 1.06.

The meeting of the ECB on the 9th of March is of secondary importance, as is the release of macroeconomic data, for which surprises are unlikely. In addition to this, figures for factory orders and durable goods in the US, industrial production in Germany, the CPI for February and GDP data for Q4 in the Eurozone are set to be released.


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