Currency Market Analysis

Sep 17, 2015 | Currency Market Analysis

Global Themes

Fed up, down or sideways? The Fed’s long awaited interest rate decision today will serve as a compass for the U.S. dollar’s coming performance. Ahead of the central bank’s 2 p.m. ET decision, the dollar was tilted toward its back foot, a reflection of how global weakness and low inflation in the U.S. may sway a ‘no’ decision to raise rates. The Fed today will let loose a triple whammy of information which makes predicting how the dollar would react anything but certain. In addition to its statement, the Fed will also issue updated projections for the economy and interest rates, and Chair Janet Yellen will break it all down in a subsequent news conference. No rate hike, coupled with a statement that plays up risk to growth from weakness in China and elsewhere, could knock the dollar lower. A rate hike, on the other hand, would surprise many and tend to lift up the dollar. Wall Street’s reaction to the Fed may also be critical for the dollar given its close correlation to stocks. Also in focus today are U.S. numbers on jobless claims, housing and the Philly Fed index.


Caution before today’s Fed decision kept the dollar favoring its back foot. Consequently, the dollar largely shrugged off mixed news on the economy. Jobless claims surprised in a good way, falling 11,000 to 264,000 which marked the fewest in eight weeks. Housing starts fell 3.0% in August, but the forward-looking building permits jumped 3.5%. The Fed’s decision today wields the potential to serve as the dollar’s GPS for the foreseeable future. Also watch Wall Street’s reaction. No rate hike could ignite a rally on Wall Street which would bode decently for the dollar given its close correlation to stocks, a key risk barometer, of late.


No change today by Switzerland’s central bank on interest rates helped the franc to a gain against the dollar. The Swiss National Bank maintained negative interest rates, though officials dubbed the franc as ‘severely overvalued’ and a threat to the Alpine economy.


The loonie continued to tread water just above 11- year lows against the dollar. It too will get a cue in the Fed’s 2 p.m. ET decision on American interest rates. No change and little clarity on when rates would rise could help reduce bearish pressure on the loonie and allow more room to the upside. Data on Canadian inflation looms Friday.


Expectations the Fed would pass on a rate hike today buoyed the euro, keeping it within reach of late August peaks. With the Fed and China hogging the market spotlight, it has for now brushed to the side the euro’s negative fundamentals of low inflation and high unemployment. The Fed’s overall demeanor today on the U.S. economy and borrowing rates should help to shape EUR/USD’s coming prospects.


Sterling grabbed a new three-week high against the dollar after U.K. consumers stepped up spending for the first time in three months with retail sales up 0.2% in August. The data followed bullish news Wednesday on U.K. wage growth whose 2.9% rise in July was the healthiest in six years, depicting the nation’s central bank in the same boat as the rate hike leaning Fed.

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