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Dollar Reverses on Fed’s Hawkish Tone

Two more central banks are set to announce rate decisions this week following the FOMC announcement yesterday; they are the Bank of England (BoE) and the Bank of Japan (BoJ).

UK retail sales and core retail sales figures for May will be released at 09:30 BST today followed by the Bank of England’s rate decision and monetary policy statement at 12:00 BST. The BoE stated in May that the rates will likely remain unchanged until the end of 2019. Be aware that the data release and the BoE’s announcement will likely cause volatility for GBP crosses.

The Bank of Japan (BoJ) will announce its rate decision and monetary policy statement at 03:00 BST on Friday June 16th. Markets are keeping a close eye on when the BoJ will begin to gradually remove its QE programme. Although the economy has seen a moderate recovery (as inflation hasn’t seen a stable upswing) the BoJ will likely keep rates in negative territory and continue the QE until it sees a sustainable pickup in inflation.

The FOMC announced a rate hike of 25 basis points on Wednesday evening, from 1.0% to 1.25%, which was In line with market expectations.

The FOMC maintained its March forecast as economic growth has continued making progress predicting moderate expansion over the next few years. Notably, the Fed sees one more rate hike by end of the year and three more rate hikes in 2018 to reflect economic growth, it expects to start shrinking its balance sheet this year.

Per CME’s FedWatch tool; the probabilities for a rate hike in September and December are 18% and 39.7% respectively. It indicates that markets see the next rate hike more likely to happen in December.

The Fed sees the job market strengthening further with the unemployment rate in 2018 revised downward from the March estimate of 4.7% to 4.6%. The Fed sees near term Inflation staying below 2%, however it is expected to move up and stabilise around 2% over the next few years as the Fed hasn’t seen broad undermining of inflation expectations.

The dollar index hit a low of 96.28, last seen on November 9th ahead of the FOMC press conference because of the disappointing retail sales and inflation data. Nevertheless, USD saw a dramatic and substantial reversal as Yellen’s overall statement was relatively hawkish, lifting the dollar with a 0.85% rebound. On Thursday, in early European session, the dollar index bulls broke the resistance level at 97.00.

On Wednesday evening USD/JPY rebounded 0.96% from a 7-and-a-half week low of 108.80, recovering the psychological level at 109.00. Spot gold fell by 1.8% from a 3-day high of $1280.56, hitting a 2-and-a-half-week low of $1257.02. GBP/USD fell around 0.68%, from a 3-day high of 1.2817. EUR/USD fell around 0.9%, from a 7-month high of 1.1295, on Thursday in early European session, the psychological support level at 1.1200 was broken again.

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