The tentative price action surrounding the Dollar yesterday saw the U.S currency remain little changed against the majors as the market prepared for FOMC rate announcement last night, where the Open Market committee elected to keep interest rates unchanged at 2.0% following an aggressive period of monetary easing.
The outcome of the two day meeting was widely expected but the somewhat bearish tone of the Fed’s accompanying statement indicated that policy makers are still concerned with the outlook of the economy, given the downturn in unemployment, housing and consumer confidence.
Nevertheless, the tone and language used in the statement also showed that although the downside risks to economic growth remain a concern, the Fed believe “they have diminished somewhat” while the “upside risks to inflation and inflation expectations have increased.”
In the aftermath of the announcement, the Dollar declined against the Euro and tested the support at 1.9660 versus the Pound amid increased uncertainty over the prospects of a U.S interest rate hike in September and the possible impact on the broader economy.
The Federal Reserve decided to hold rates after the most aggressive period of monetary easing in 20-years while the Chairman, Ben Bernanke, expects oil prices to moderate over the coming months, which coincides with an earlier report that U.S inventories climbed for the first time in six weeks.
Despite oil prices retreating by $4 at the close last night, the Dollar continued to plummet while a separate report earlier in the session reiterated the Fed’s concerns as sales of new homes extended their decline while orders for U.S durable goods remained unchanged in May.
The overwhelming contraction in the U.S housing market shows few signs of abating while labour market conditions are worsening and consumer confidence slumps to the lowest level in 26-years according to the Michigan sentiment survey.
As a result, the Dollar is struggling amid speculation that a U.S interest rate hike is still months away, while the focus today will fall on the final estimate of gross domestic product in the first quarter and the report is expected to confirm that growth was slightly up on initial forecasts.
The Euro took advantage of broad Dollar weakness and also rallied against the Pound late last night as the stubbornly hawkish stance of European policy makers means that the ECB are the more likely to implement a rate hike over the coming months.
The slightly neutral stance of the Fed’s accompanying statement last night combined with the heightened concerns over the outlook for the UK economy is contrasted perfectly with the hawkish tone from the ECB’S Axel Weber, who again focused on the upside inflationary concerns.
A fundamental lack of UK economic data yesterday means that the Pound was largely reactive to news from the U.S but for a second time this week the Deputy Governor of the Bank of England, John Gieve, poured scorn on the prospects for growth, saying that the worst is yet to come for the UK economy.
Data Released 26th June
EU 09:00 M3 / 3 Month Moving Average (May)
U.S 13:30 Gross Domestic Product (Final Q1)
U.S 13:30 Jobless Claims (w/e 20th June)
U.S 15:00 Existing Home Sales (May)
U.S 13:30 Jobless Claims (w/e 20th June)
U.S 15:00 Existing Home Sales (May)
written by Adam Solomon
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- The Federal Reserve raise U.S interest rates to 5.25% and it looks increasingly likely that further tightening of monetary policy is on the agenda
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