As expected the Fed raised interest rates causing increased volatility for the US Dollar currency pairs, but earlier on the day some important US economic data added a downtrend and selling pressure for the US Dollar.
The Fed raised its benchmark Fed funds rate 0.25% now having a lower bound of 1.00% and an upper bound of 1.25%, a decision widely anticipated. It also announced it would begin cutting its holdings of bonds and other securities this year, and made forecasts about the state of US economy. Specifically the Fed made the forecast about a U.S. economic growth of 2.2 percent in 2017, an increase from the previous projection in March. Inflation was expected to be at 1.7 percent by the end of this year, down from the 1.9 percent previously forecasted.
The forex market anticipates one more interest rate hike from the Fed in 2017, and Federal Reserve Chair Janet Yellen said “the U.S. economy will expand at moderate pace over the next few years, warranting further increases in interest rates”, and “Employment is near its maximum level and the committee expects inflation to move and stabilize around 2% over the next couple of years”.
Earlier some economic data showed a Consumer Price Index reading of 1.9%, lower than the forecast of 2.0% for the month of May. And Advance Retail Sales for the month of May were also weaker than expected with a reading of -0.3% versus the forecast of 0.0%. And again a surprise in US Crude Oil Inventories caused significant volatility for oil prices and USD/CAD pair.
As a result the US Dollar earlier that day was under severe selling pressure, due to disappointing economic data, but after the interest rate decision it reversed plenty of its weakness. The forex market now will have time to evaluate the meaning and importance of this interest rate hike from the Fed. In general terms, this interest rate increase is bullish and positive for the US Dollar, at least in the long-term. The reason is that now the US Dollar offers greater return for investors and traders and a higher interest rate differential compared to other currencies such as the Euro, Japanese Yen and Swiss Franc. All these currencies have zero or negative interest rates compared to the US Dollar.
This interest rate decision by itself is a very strong fundamental factor to potentially form new trends and a reversal of recent weakness for the US Dollar. But as in almost all cases, more economic data will be needed to analyze the optimistic view about the state of US economy as the Fed presented.
Important economic calendar data for Thursday 15th June 2017
Another day of increased volatility could be expected today, as the unemployment rate of the Australian economy, and 2 interest rate decisions, one related to the Swiss economy and another to the UK economy, and US labor market data, have a lot of significance and can move the forex market.
In many cases it takes time for a new trend to form, but from a fundamental analysis gold prices could be under selling pressure due to the new US dollar interest rate hike, while oil prices will be prone to announcements about further inventories and supply cuts.