Hawkish FOMC Boosts US Dollar

U.S. Federal Reserve’s Federal Open Market Committee (FOMC) meeting concluded today with the release of its rate statement. There was little surprise in the document as the Fed announced it will end its quantitative easing (QE) program at the end of October. The interest rate was held at the 0.0% to 0.25% target range. The tone of the statement was a bit more hawkish than expected as there was no mention of European and global growth risks, but the focus was on positive U.S. employment and reduced inflation. The EUR/USD continued to depreciate below the 1.27 price line as there is an expectation that a rate hike will be announced by the Fed in 2015 although the exact timing is hard to predict.

The Federal Reserve continued to use the “considerable time” language which does not give a hint of when exactly they will consider a rate hike, but even with that line still in the statement the U.S. central bank is the most likely to hike first next year.

Inflation and employment two of the main economic gauges the Fed looks at were given an optimistic outlook. Inflation continues to be lower than target but a slight pick up is expected. In general the members of the policy board seemed pleases with the recovery of the U.S. job market.

There was one dissenter in the FOMC vote. Narayana Kocherlakota voted against the end of QE as he believed inflation would be weaker going forward and the Fed should maintain current asset purchase program levels for the time being. Kocherlakota has been a vocal critic of raising rates too early and he believes that is the expectation of the market, which he is advising the Fed now to change the benchmark rate until the economy can sustain growth after such a major shift.

Stock markets were expecting that the Fed would have been moved by the latest volatility shocks and signs of weakness from the U.S. economy. The resulting hawkish outcome sent stocks downwards following the FOMC announcement.

Tomorrow chair Janet Yellen will be in Washington D.C. to deliver the opening remarks at the Board of Governors of the Federal Reserve System National Summit. A half an hour earlier the preliminary gross domestic product (GDP) figures for the U.S. would have been released. The expectation is that the GDP will be lower than the fantastic Q2 numbers (4.6%) but still at a respectable 3.1%. The EUR/USD will continue to be under pressure as better economic and policy member rhetoric support the USD. On the other hand flash consumer price index data will be released in Europe which could put the European Central Bank under added pressure. More stimulus is needed as admitted by the ECB, but local governments have to agree on a concentrated effort, which is problematic as Germany does not agree sovereign bond-buying is the best approach, although it would be the most effective.

For the full text of the Federal Reserve’s FOMC Statement click on the link

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza