Dollar rallies strongly after Fed hinted a rate hike in December: Sept 21, 2017

Market Review - 20/09/2017  21:38GMT 

Dollar rallies strongly after Fed hinted a rate hike in December

The greenback rallied across the board on Wednesday after the FOMC kept rates on hold but hinted at 1 rate hike this year and a potential 3 next year.  

FOMC stated 'In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.'  

Versus the Japanese yen, dollar remained on the back foot in Asian trading and fell from 111.65 to 111.23 in European morning before staging a recovery to 111.54 in New York morning ahead of the Fed's rate decision. Later, the greenback briefly spiked lower to 111.12 after Fed left interest rate unchanged but swiftly rallied to a 2-month high of 112.53 when Fed's "dot-plot" signalled a rate hike at December's meeting.  

The single currency rose in Asian morning and hit session high at 1.2022 in European morning before retreating to 1.1985 in New York morning. Despite a brief jump to a 1-week high of 1.2035 after unchafed Fed's rate decision, euro tumbled to session lows of 1.1862 on dollar's broad-based strength following release of hawkish Fed's "dot-plot".  

The British pound traded sideways in Asia before jumping to 1.3607 in early European morning on the back of robust U.K. retail sales data. Despite a brief pullback to 1.3516 on news of a suspicious package in London's financial district, price found renewed buying there and staged a recovery to 1.3602 in New York afternoon. Cable then briefly spiked up to a fresh 14-month peak at 1.3659 in New York afternoon before tumbling to session lows of 1.3452.  

In a report, UK Office for National Statistics said that retail sales increased by 1.0% in August from the prior month, compared to the previous 0.6% advance which was revised from an initial 0.3% increase. Analysts had expected August's reading to increase by just 0.2%.  

In other news, Fed's Yellen said 'fed is prepare to adjust monetary policy as needed to get inflation back to 2 pct; federal fund rate will not have to rise much further to get to neutral stance; inflation running below 2 percent for long time is a concern; shortfall of inflation this year is more of a mystery; fomc does not fully understand causes of weak inflation; if it proves that inflation shortfall persists, it will be necessary to change monetary policy to address it; tightness in labor market will lag in pushing up wages, prices; it is not easy to get a clear read on the implications of asset prices for the overall economic outlook; fed is taking into account movements in asset prices in deciding rate hikes; if federal funds rate is insufficient to respond to change in outlook, fed may stop balance sheet roll-off.'  

On the data front, the industry data showed that home resales unexpectedly decreased by 1.7% in August to a seasonally adjusted 5.35 million units from 5.44 million units in the previous month. That was the lowest reading since the same period in 2016. The consensus forecast was for a 0.3% increase to 5.44 million units in August.  

Data to be released on Thursday: 

New Zealand GDP, Japan BoJ interest rate decision, all industry activity index, Swiss trade balance, exports, imports, U.K. BBA mortgage approvals, PSNB, PSNCR, Canada wholesale sales, EU consumer confidence and U.S. initial jobless claims, Philadelphia Fed survey, monthly home price, leading indicators.