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Hawkish FOMC Sets Tone for 2016

The Federal Reserve Begins a Rate Hike Cycle in the United States as Conditions Improve

After years near the zero bound, the Federal Reserve made its first move on the path toward monetary policy normalization with its decision to raise interest rates.  The reaction in markets was surprisingly calm considering what was at stake for financial instruments, with the dollar strengthening following the announcement and precious metals tumbling.

Weekly Review

As 2015 winds down, trading volumes continue to fall as investors take profits and close out positions in anticipation of the beginning of 2016.  The main event driving market direction and momentum was the most recent Federal Reserve interest rate decision which saw a more hawkish outlook for interest rates.  Although just the first rate hike, the FOMC is expected to raise rates additionally in the coming year, adding to upward momentum in the US dollar while Central Banks of other advanced economies watch to see the impact.  After suffering from profit-taking, the US dollar began to rebound against major peers with US equity benchmarks retreating from gains after the announcement and likely to continue trending lower over time.  Other Central Banks chose to hold off from adjusting interest rates with the Bank of Japan and Norges Bank leaving the key rates on hold at 0.10% and 0.75% respectively.  In a growing sign of recovery, consumer price inflation in both the Euro Area and United Kingdom surprisingly rose back into positive territory as accommodative monetary policies bear fruit.

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usdcadweeklyreview12202015

The Week Ahead

Holiday sessions are abundant in the coming trading week with select markets closed for Christmas Eve and Christmas.  Abbreviated trading means transaction volumes will likely be lower as traders continue to pare down portfolios ahead of the New Year.  The key data to be released in the coming week is mainly from advanced economies with the United States and United Kingdom set to report final third quarter GDP figures.  US GDP is expected to have experienced 2.10% expansion in the third quarter in another sign of a strengthening fundamentals.  Aside from GDP, the United States is set to announce a slew of economic reports regarding the investment climate and housing sector with durable goods orders and new home sales.  Although housing data is forecast to improve, durable goods are set to experience a measurable decline with the core figure expected to remain just marginally in positive territory.  In Asia, Japan will be releasing the latest inflation reading although policymakers do not expect a measurable uptick with the 2.00% inflation target remaining elusive. 

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