USD/CHF extends gains, nearing 0.8200 with all eyes on the Federal Reserve
- The US extends gains for the fourth consecutive day and is nearing 0.8200.
- Fears of an escalation of the Middle East conflict are keeping the US Dollar buoyed.
- Investors are looking at the Fed for more clues about the bank's monetary policy plans.
The US Dollar is heading higher for the fourth consecutive day on Wednesday. The pair has rallied about 1.5% from last week lows at 0.8050 to return to the upper range of the 0.8100s as the market braces for the Fed’s monetary policy decision..
The Dollar has been drawing support from the risk-averse sentiment this week, in a rush for safety, with investors increasingly weary that the IS-Iran war escalates with the involvement of the US.
On Tuesday, US President Trump’s comments demanding the unconditional surrender of the Iranian authorities and his veiled threats to kill the Islamic Republic’s supreme leader Ali Jamenei crushed appetite for risk and sent the US Dollar higher across the board.
The Swiss calendar is void on Wednesday, and all eyes will be on the Fed’s monetary policy decision, more specifically on Chairman Powell’s comments and on the bank’s monetary and interest rate projections.
Investors will be eager to know if the soft US data seen recently has prompted the bank to consider any further interest rate cuts over the coming months. Markets are expecting two more rate cuts this year, with the first one coming in September, and will be eager to see some confirmation of these views.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
