USD

The dollar fell yesterday afternoon following the Federal Reserve interest rate decision which saw the US central bank increase interest rates by 25 basis points, taking US interest rates to their highest level since September 2007. The voting pattern was unanimous in so far that all voting members opted for a 25 basis points hike taking the rate to a range of 4.75% to 5%.

However, the dollar depreciated as the accompanying statement was interpreted as ‘dovish’ by markets. The statement replaced the wording “ongoing increases in the target range will be appropriate” with “some additional policy tightening may be appropriate”.

The latest quarterly projections show the Fed Policy Committee members expect the US interest rates to end at 5.1%, which implies the members of the Fed expect at least one further hike. This is inconsistent with money market pricing which, following the rate decision and press conference, expect three to four rate cuts by year-end.

This is despite Fed Chair Jerome Powell indicating that rate cuts are currently not in the central banks “baseline expectation”. It’s clear that market expectations are currently at odds with the Federal Reserve.

We can expect the next few weeks to be highly volatile as the spotlight returns to the economic data; namely inflation and economic growth data. Any indication that both inflation and the US economy are slowing will play into the market narrative that rate cuts are on the horizon and vice versa.

Key announcements

12:00 – GBP – UK interest rates expected to increase to 4.25% from 4%
12:30 – USD – Initial Jobless Claims