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Dollar Dips Despite Fed Tightening

Daily Analysis - 19/03/2017

Federal Reserve’s Dovish Hike Sinks Dollar, Spurs Equity Rally

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After weeks of speculation, the US Federal Open Market Committee vote to increase the benchmark Federal Funds rate by 25 basis points to 1.00% from 0.75%.  However, despite the more hawkish decision, the language statement highlighted more gradual rate hikes, sending the dollar spiraling lower as precious metals and global equities climbed following the decision.

 

Last Week


The US dollar rally over the last few weeks quickly gave way to losses amid the Federal Reserve’s decision to raise interest rates by a quarter point while outlining plans to raise rates another two times before the calendar year ends.  Although equities managed to react positively, slowing GDP growth and employment gains have seen the Fed take a less hawkish stance despite its intention to continue normalizing monetary policy.  Nevertheless, with inflation still on the rise as evidenced by the latest PPI and CPI data, the Fed will have more room to raise rates if the trend stays intact.

Despite the Fed’s move, other global central banks refrained from adjusting policy.  The Swiss National Bank and Bank of Japan opted to leave interest rates in negative territory.  On the other hand, the Bank of England experienced some dissent after one member of the Monetary Policy Committee opted to vote in favor of raising interest rates. Aggregate Euro Area inflation experienced no major changes during the reading last week with headline inflation printing at 2.00% and core inflation matching the preliminary estimate of 0.90%. To cap off the week, Chinese industrial production and fixed asset investment gained ground whereas retail sales underwhelmed expectations by a wide margin.

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The Week Ahead


Following a week full of major decisions, the upcoming sessions are expected to be significantly quieter.  Kicking off the week is the Meeting Minutes from last week’s decision from the Reserve Bank of Australia.  Considering the downside risks highlighted during the last statement, expect more language related to exchange rate intervention.  Apart from Australia, New Zealand is set to unveil its own interest rate decision, with the Reserve Bank forecast to leave rates on hold at 1.75%.  However, a weak GlobalDairyTrade Index reading could foreshadow more policy easing during the second quarter if the situation does not reverse.  Also due are the meeting minutes from the Bank of Japan alongside the latest trade figures.  After reporting a trade deficit last month, expectations are for trade to swing back to a surplus as exports swell and import growth subsides.

Moving west, the UK will be in the spotlight with inflation data as consensus foresees headline inflation rising to 2.10% for February.  Mainland Europe will see services and manufacturing purchasing managers’ indices released by France, Germany, and the Euro Area.  To round out the week, the US will be reporting durable goods orders figures alongside existing home sales and new home sales.  However, with mortgage costs on the rise, sales momentum may subside.

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