|

Fed Quick Analysis: Five hawkish moves that may push the dollar higher

  • The Fed cut interest rates by 25 basis points as expected.
  • Several changes in the statement hint that the bank is set to pause.
  • The US Dollar may advance once the dust settles.

"Hawkish cut" is what the markets had expected and precisely what the Federal Reserve has done. While the Fed cut rates for the third consecutive time, five critical hawkish developments may boost the dollar.

1) Appropriate path of interest rates

A small semantic change can do wonders. The Fed abandoned the pledge to "act as appropriate" to "it assesses the appropriate path," – thus lowering the chance of an imminent cut. 

2) Subtle change on inflation

When referring to market-based measures of inflation, the Fed now sees them as steady, saying they "remain low" against "have declined" – no more adverse developments.

3) Content with employment

The Fed reiterates that job gains have been solid and that the unemployment rate remains low. It seems to be shrugging off the slowdown in hiring. Is it hinting that Friday's jobs report will be upbeat? 

4) Bullish on consumption

Officials were satisfied with their two mandates of inflation and employment, and they are also bullish on consumption. They state that household spending has been rising at a strong pace. They do not seem to worry that the American consumer is holding the economy on its own. 

5) Hawkish dissent

Esther George, President of the Kansas branch of the Federal Reserve, and Eric Rosengren, her peer from the Boston Fed, voted against the cut. The pair have been persistent in rejecting additional stimulus.

Moreover, James Bullard, that voted in September for a double-dose 50bp rate cut has voted with the majority – no dovish dissenters.

Dollar reaction

All in all, the Fed has made a full "hawkish cut."

On this background, the US dollar has room to rise. The greenback's reaction has been initially muted, as markets are cautious. However, once the dust settles from Fed Chairman Jerome Powell's press conference, currencies may move. 

Background: What the Fed was considering

The Federal Reserve has been dealing with conflicting economic signals. The consumer remains robust, with upbeat confidence, robust retail sales, and rising wages. On the other hand, manufacturing is suffering from a slump, and the jitters in investment are worrying. 

The most recent figures have shown only a modest slowdown in growth, to 1.9% annualized, but the same trends of strong consumption and contracting exports and investment. 

And while the US and China agreed on Phase One of the trade deal, the level of uncertainty remains elevated, and damage to the economy has been done. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

AUD/USD hangs close to monthly lows, still defends 0.7100 ahead of Fed decision

AUD/USD retains its negative bias for the third straight day, defending 0.7100 while trading close to a monthly low in Wednesday's Asian session on Wednesday. The US Dollar stands firm near a two-week high as the anticipated Fed rate hike and oil-driven inflation fears continue to push US bond yields to a multi-year high. Furthermore, escalating Middle East tensions benefit the safe-haven buck and weigh on the risk-sensitive Aussie.

USD/JPY holds firm above 155.00, awaits Fed policy announcements

USD/JPY climbs to a fresh one-week high above 155.00 in the Asian session on Wednesday amid a bullish US Dollar. Oil-driven inflation fears, along with the anticipated Fed rate hike, continue to support surging US bond yields. Moreover, rising US-Iran tensions underpin the USD's reserve currency status. The pair, however, remains below the mid-155.00s as bulls seem hesitant ahead of the Fed decision later today and the BoJ meeting, starting on Thursday.

Gold bounces to $4,350; focus on the Fed

Gold sets aside two daily declines in a row, gathering some composure and revisiting the $4,350 zone per troy ounce amid decent gains midweek. The precious metal’s recovery comes despite an acceptable advance in the US Dollar and declining US Treasuty yields prior to the anticipated rate hike by the Fed.

XRP Price Forecast: XRP clings to 50-day EMA support after CLARITY Act setback
Ripple (XRP) trades lower around $1.28 on Wednesday, as investors broadly assess the impact of the failed United States (US) Senate vote on the CLARITY Act and the upcoming Federal Reserve (Fed) monetary decision. The remittance token has trimmed early-week gains that tagged highs around $1.50 on Monday and now holds key moving-average support.
Federal Reserve set to raise interest rate after five meetings on hold
The United States (US) Federal Reserve (Fed) announces its interest rate decision on Wednesday, following another pivotal meeting that could provide key insights into the monetary policy outlook heading into the end of the year.
How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.