US Dollar Eases Despite Hawkish Fed Statement

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The US dollar fell against its peers on Wednesday after the Federal Reserve’s policy statement saw the markets reassess the rate hike expectations over the coming months. The ICE Futures US dollar index fell 0.38% on the day, closing at 96.79 and extended its declines for a third consecutive day and we expect the declines to fall towards the 95 price zone as outlined in the US dollar technical outlook previously

In the July meeting, the Fed kept rates steady as expected and also upgraded its assessment of the US economy. The Fed acknowledged the improvements in the labor market noting “near-term risks to the outlook have diminished,” which was seen by many as a potential hint for a rate hike in September. However, many expected a more direct hint to the September rate hike than what was mentioned. Sam Lynton-Brown from BNP Paribas notes, “But some investors had expected more explicit language from the Fed about rate increases in the coming months.” Still, a few see the statement as being upbeat. Roberto Perli from Cornerstone Macro LLC called it “an upbeat statement, although guarded. It’s a sign of a little bit of confidence, if you want, in the outlook going forward,” he said. Among the voting members, Esther George, president of the Kansas City Fed was the lone dissenter who voted for a rate hike at the meeting for a quarter-point increase.

FOMC statement summary:

  • Kansas City Fed’s George Dissents in Favor of Higher Rates
  • Labor Markets ‘Strengthened,’ Data Points to Further Utilization
  • Inflation Continues to Run Below Fed’s 2% Target

Read the FOMC Statement from the Fed here.

The dollar managed to briefly push higher before giving back its gains and closing lower on the day, but the dollar managed to hold its ground against the Canadian and Australian dollar and the yen.

The CME Futures’ fed funds watch still shows a lower probability of a September rate hike, at 18.0% as of 27th July closing time.

CME Futures Fed funds watch probability (July 27, 2016)
CME Futures Fed funds watch probability (July 27, 2016)

Spot gold prices surged following the FOMC statement yesterday, closing the day 1.51% higher, settling at $1339.92 an ounce. Peter Hug, global trading director at Kitco Metals, says that the rally in gold was because the markets were unconvinced. He said, “The Fed will be unable to raise rates this year even as officials point to near-term economic risks receding. The spike is a scrambling short-covering rally but may set up a test of the $1,355 level–which if surpassed opens up the 2016 high of $1,376.”

The 10-year US Treasury yields closed lower following the FOMC statement, at 1.513 or about 0.13% lower on the day, while the US equities remained flat. The Dow Jones industrials ended the day 1.58 points lower while the S&P500 closed 2.60 points lower on the day. The Nasdaq was unchanged.

US 10-Year Treasury Yield (1.513), July 27 2016
US 10-Year Treasury Yield (1.513), July 27, 2016

Looking ahead, it is another slow day for the markets today with no major economic releases on the agenda, leaving most of today’s prices moves to technical trading. The yen is looking stronger heading into tomorrow’s BoJ decision. In the US, the markets will be anticipating the first estimate of the Q2 GDP tomorrow, forecast to rise 2.60% in the three months to June.


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