Fed raises rates and their future guidance is far more bullish than expected

Every investor, trader and analyst around the world was focused on one event yesterday and that was the Fed meeting on the interest rate policy as its significance could not be overstated. We spent a lot of time in our recent reports explaining its significance for investors, the potential scenarios and what would each entail for the Dollar and the global money markets in general.

It turns out that the last scenario we explained to our audience, the one where the Fed decides to be bold and bullish over the domestic economy’s outlook, was the one that actually took place in the end. The Federal Reserve did raise interest rates by 0.25% as expected for the first time in 9 years but instead of sounding conservative they opted for more support to the economy. They raised their forecasts for 2016, downplayed their concerns about the global slowdown and the low inflation and telegraphed that 4 more rate hikes should be expected during next year.

What is truly remarkable though is the fact that the way they had prepared the market and set expectations meant that the reaction from the major currency pairs was limited. Everyone who wanted to be long Dollars was been already positioned in the market regardless of the recent 5% drop against the Euro and the other majors so the aftermath of the event was a smooth rise for the US currency across the board.

Moving forward we should remain bullish on the Dollar, the next year could see strong gains for it but we should not drop our guard for the next 2 weeks as investors might look to bank profits and drive volatility higher and the buck lower temporarily. On the short-term focus, the IFO Survey is pending for release from the Euro area today and the UK Retail Sales numbers from the UK. Both reports could provide the spark for volatility to remain elevated today.

Yesterday, the Euro spiked to 1.1000 after the Fed event but later turned lower and overnight the Single currency posted a 1.0830 low. This morning the Euro is recovering and a good IFO report could drive it towards the 1.0900 level but all rallies should be treated as potential selling opportunities now that the Dollar got an outlook bump. The Cable lost the 1.5000 area after the Fed even though it initially spiked to 1.5100, the focus today is on the Retail Sales and the risk is to the downside for the UK currency that could see fresh lows if the numbers disappoint.