USD Recovers After Market Expects At Least Two Rate Hikes in 2016
The Federal Open Market Committee (FOMC) minutes that will be published on Wednesday, February 17 at 2:00 pm EST have the potential to create market disruption, but it will be limited given the events that unfolded in the three weeks between January’s FOMC meeting and the release of the notes. The U.S. Federal Reserve opted not to raise rates after the end of its meeting in January. The market had forecasted the Fed to stand pat in the first FOMC of the year after the volatility in the first two weeks had drastically changed the macro economic outlook with a major sell off of equities in China and the price of oil dropping like a stone affecting commodity currencies. With no press conference after the meeting, the market was unsure on what Fed members were influenced by the developments in the global economy.
The minutes from the December FOMC minutes showed that even though the vote to raise interest rates was unanimous, there were several Fed members that remained unconvinced. Those fears were proven right as in a matter of weeks the economic scenario changed for the worse. The Chicago Mercantile Exchange’s FedWatch tool has a 95.9 percent probability of no rate change in the March FOMC meeting. Less dovish comments from Fed members have managed to boost the chances of a June rate hike with a 11.6 percent probability using the FedWatch tool. Fed Chair Janet Yellen’s testimonies last week validated the statement that the U.S. economy is growing, but it faces exposure to macro headwinds.
Fed Chair Janet Yellen’s two testimonies last week addressed some of gaps in communication between the FOMC January statement and the release of the minutes from that meeting. After raising rates at the end of 2015 the Fed is now in an awkward position given the acceleration of headwinds in global growth. The market was heavily anticipated a Fed Funds rate hike as a sign of recovery. The Fed complied although it left it late in the year and now there is are some who question not only the timing, but also the direction as the Fed might be forced to go to negative rates following Europe and Japan.
Chair Yellen continues to believe the U.S. is growing at a moderate pace. Most of the risks in her view come from abroad. The fragile state of the global recovery is under treat from lower energy prices and emerging and developed market slowdowns. After the credit crisis developed markets stalled, but emerging markets revved up growth. Now the slowdown is if affecting all markets with few exceptions. Chair Yellen was sure to answer the negative rates question, and while she does not think is needed at this time, the central bank will be vigilant and will act accordingly which does not rule out negative rates.
The USD staged a recovery on Tuesday following a long weekend in the U.S. The currency gained against the EUR and the CHF. the FX market anticipated no rate hikes in 2016 but those were dialled down and the dollar was higher on rate divergence expectations. Investors will be going through the minutes from January’s FOMC meeting to try and gleam any insights regarding potential moves by the central bank. The election cycle is just starting to heat up, which will limit the ability of the Fed to act close to the presidential elections, so realistically there is room for 2 to 3 rate hikes, that is if the economic data justifies them.
USD events to watch on Wednesday:
Wednesday, February 17
8:30am USD Building Permits
8:30am USD PPI m/m
2:00pm USD FOMC Meeting Minutes
*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.