U.S. dollar spikes as FOMC commits the Fed to begin quantitative tightening and balance sheet reduction, as of October
The FOMC announced no rate change, at the conclusion of their two day meeting on Wednesday evening, the key rate of 1.25% remains unchanged. However, in the accompanying narrative, they suggested that one more rate rise could happen in 2017, with December the likely date. And as from October they’ll begin to relieve and gradually reduce the Fed of its $4.5 trillion balance sheet, which ballooned as a consequence of the asset purchase programme, reaching a peak of activity from 2011 onwards, when it was originally circa $1 trillion, until a tapering exercise began to eventually end the programme, in 2015. The FOMC/Feds also committed to raise rates up to three times in 2018. Therefore, the USA economy could be looking at the key interest rate normalising to circa 3%, by the end of 2018. The challenge will now be on other Western Hemisphere central banks to follow suit, or find their currencies devalued and their domestic inflation spiking, potentially above their desired targets.
As a consequence of the FOMC announcement EUR/USD slumped through S3, down circa 1% to end the day at circa 1.1890. USD/JPY ended the day breaching through R2, up 0.7% at 112.37. GPB/USD whipsawed throughout the trading sessions and as the FOMC announcement was revealed, eventually the currency pair only fell by circa 0.2% to 1.3497, indicating that sterling has some strength and support behind its recent recovery. This evidence was reaffirmed as EUR/GPB fell circa 0.5%, through S2, to end the day at approx. 0.8808. Retail sale figures rebounding in the U.K., both MoM and YoY, did much to allay fears over the Brexit impact, with both metrics beating the forecasts.
The dollar index rose by circa 0.5% on Wednesday. Gold, similar to yen, shed its safe haven appeal after the FOMC announcement, falling by circa 0.8% through S3 and to $1301 per ounce, whilst falling to a session low, right on the $1300 handle. WTI oil rose by circa 2%, to end the day above the 50:00 handle, at circa $50.70, the highest level reached in over seven weeks. The kiwi, the New Zealand dollar, enjoyed a bounce and a positive day versus the majority of its peers, as recent polls suggested that the current incumbent National Party, may hold onto power when the weekend’s election is concluded, despite the recent surge in popularity from the Labour Party. Late evening the latest GDP data for N.Z. came in right on target, at 0.8% growth for Q2 and 2.8% YoY.
In other major economic calendar news, weekly mortgage applications in the USA slumped by -9.7%, existing home sales missed forecast, by coming in at 5.35m annualised, falling by -1.7% MoM. Looking at global equity indices the DJIA closed up marginally at 0.19%, and the SPX up 0.06%, the NASDAQ slipped by -0.08%. European market indices also experienced mixed fortunes on Wednesday; STOXX 50 closing down 0.16%, FTSE 100 down 0.05%, DAX up 0.06% and the CAC up 0.08%.
Significant economic calendar events for September 21st, all times quoted are London GMT time
06:30, currency impacted JPY. BOJ Kuroda speaks at press conference after MPM. After holding a BOJ monetary policy meeting, the governor will deliver a speech, which could impact on yen.
08:00, currency impacted EUR. ECB Publishes Economic Bulletin. This publication could outline policy, regarding the current zero base rate and quantitative easing/the ECB asset purchase programme.
08:30, currency impacted GBP. Public Sector Net Borrowing (Pounds) (AUG). The U.K is expected to have borrowed £6.4b in August, after a surprise fall to £-0.8b recorded in July.
12:30, currency impacted USD. Initial Jobless Claims (SEP 16). The forecast is for a rise to 302k, from the 284k recorded in the previous week’s figure.
12:30, currency impacted USD. Continuing Claims (SEP 09). Claims are predicted to show a rise to 1975k, from the 1944k registered in the previous week.
13:30, currency impacted EUR. ECB President Mario Draghi speaks in Frankfurt. Coming after the ECB bulletin and after the FOMC meeting, investors will listen carefully for any hawkish tone from the ECB president.
14:00, currency impacted USD. Leading Indicators (AUG). A slight fall is predicted to 0.2%, from 0.3% in July.
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