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US Dollar takes a backseat as Fed funds rates unchanged

The Aussie and the Kiwi dollars surged on a weak US Dollar, emerging as the top performing currencies for the week against the Greenback while Gold futures rallied to post a one week high at 1140.85 before easing back towards late Friday. Other Central banks that met last week included the Bank of Japan which left its QQE purchases unchanged while maintain an optimistic view of hitting the central bank’s target inflation rate of 2%. The Swiss National Bank also convened its quarterly monetary policy review leaving the Libor rates unchanged at -0.75% but maintained a largely neutral tone.

Weekly Review

With the FOMC opting to keep the fed funds rates on hold at <0.25%, the US Dollar and the US equities took a dive as the FOMC statement was viewed as being very dovish. The Staff Economic Projections were also revised lower on the rate hike expectations as the futures markets re-priced for a rate hike towards early 2016. Majority of participants however expect to see at least one rate hike by 2015 end, while one member expected negative interest rates with six members expecting two or more rate hikes this year. The FOMC also revised down its NAIRU from 5.0% – 5.2% to 4.9% – 5.2%. The long run GDP is expected to grow at a slower pace of 1.8% - 2.2% from 2.0% - 2.3% in July. In the press conference, Fed Chair Janet Yellen cited concerns of the impact of a rate hike against weakening global economic sentiment and the subdued inflation. She said that further slack in the labour markets needed to be absorbed before being reasonably confident for hiking rates. Overall, the FOMC event last week turned out to be a close call as unemployment continued to improve but confidence was eroding as far as inflation was concerned. The US equity markets also weakened after the FOMC with the S&P500 December futures briefly testing the highs above the 2000 handle and closed the week nearly unchanged at 1961.

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The Week Ahead

After a busy week, the markets look forward to the week ahead which is relatively light in comparison. While there are no major market moving events in the first part of the week, Eurozone flash PMI manufacturing and services data are due for release on Wednesday, the 23rd September including China's flash manufacturing PMI as well. In the US, the monthly durable goods orders and the final revision to the second quarter GDP will be released. The week ahead will also be marked by various Central banker speeches with Janet Yellen due to speak on Friday at the University of Massachusetts and Atlanta Fed, Dennis Lockhart due to speak on Monday. ECB Chief, Mario Draghi will be testifying to the European Parliament's economic and monetary policy in Brussels. EURUSD rallied last week to briefly trade near the weekly highs of 1.1448 but weakened significantly into Friday’s trading session. The single currency declined to settle the week at 1.1297 erasing most of the pre-FOMC gains.

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