The two-day meeting of the Federal Reserve that ended today was the last for Fed Chairman Janet Yellen. Since February, the new head of the central bank will be Jerome Powell.
The rhetoric of Fed comments after today’s decision on rates and forecasts for the growth of the US economy, inflation and interest rates was similar to the rhetoric that the US central bank adhered to in December. In its statement, the Fed indicated that inflation, which remained stable at a low level, is likely to grow in 2018. “The level of employment, household expenses and companies’ investments were marked by a significant growth, while the unemployment rate remained low”, the Federal Reserve said in a statement.
According to the official statement of the FRS Committee on open market operations published after the meeting, the central bank still intends to make the next rate increase in March. Shortly after this statement, the Fed’s interest rate futures indicated an 86% probability of a rate hike in March (compared to 74% a week ago and 52% at the end of December). If the Fed will raise rates every three months by 0.25%, i.е. quarterly, then by the end of the year the range of interest rates of the Fed can reach 2.25% – 2.50%.
If the Fed raises rates at a faster rate than expected, it could cause a dollar to rise, as higher borrowing costs make the US currency more attractive to investors seeking stable yields. In December, the leaders of the Fed signaled that in 2018, there are expected three rate hikes and two more – in 2019.
In the meantime, the dollar is declining. Since the decision of the Fed, which was published at 19:00 (GMT), was expected, the dollar reacted with sufficient restraint to it, continuing to remain under pressure at the end of the trading day on Wednesday. The dollar index DXY, reflecting its value against the basket of 6 other currencies, has returned to the opening level of the trading day near the level of 88.95, which is not much higher than the multi-month low near the mark of 88.25 reached last week. The yield of 10-year US bonds remained almost unchanged, remaining near the 2.725% mark (the highest level in almost four years).
Investors buy other major world currencies in anticipation of accelerating growth abroad. The recovery of the US economy began in 2009, becoming one of the longest in history. Now the center of growth of the world economy can shift to other regions, and investors are moving funds to economies that are closer to the beginning of their economic cycle. And if the process of tightening the monetary policy of the Fed slows, the dollar will not be able to resist further decline.
There is a rare almost paradoxical phenomenon, which seems to suit the White House, the Fed, and the US stock markets. FRS interest rates are rising, the Fed’s portfolio of assets is shrinking, the stock market and yield of government bonds are growing, but the dollar is getting cheaper, increasing the competitiveness of American goods abroad and artificially reducing the deficit of the US foreign trade balance, which is about $ 50 billion according to recent data. Many economists still believe that the dollar is only at the beginning of its many years decline.
Returning to the economic calendar, we note that after the publication of the Federal Reserve decision on rates, the emphasis of traders’ attention shifts to the publication on Friday (13:30 GMT) of data from the US labor market for January. It is expected that the number of jobs outside agriculture increased by 184,000, which is above the average for six months of 166,000 (the previous value was +148,000); unemployment remained in January at 4.1%, hourly wages of Americans increased by 0.3% in January. The dollar is likely to be strengthened if the data will be confirmed or better.
It is worth noting that the ADP’s monthly report on employment in the private sector of the American economy, published today, pointed to an increase in the number of employees in January (+234,000 vs. the forecast of +185,000 and +242,000 in December). Although the ADP report does not directly correlate with Non-Farm Payrolls, however, it suggests that a report from the US Department of Labor on employment will also be strong. And this is a positive factor for the dollar.
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