The feds have emerged from their meeting and voted to leave interest rates unchanged. This hawkish stance seen since early in the year saw to the USD exchange rate spikes. There is no doubt that fed policy decisions always impact on the dollar as well as major pairs.
The feds decision highlights
One of the highlights from the decision by the feds was the decision to normalize the country’s balance sheet so that the spending levels can be reduced. A contraction of $10 billion is expected on a monthly basis from the month of October 2017
The expectations of the feds are that the economy should witness mild dislocations as a result of the impact of Hurricane Irma and Harvey respectively.
In terms of inflation targets, there have been expectations that it will return to expected levels from the fiscal point of view, though it is still off the mark at present.
Experts have hit out saying that no sane mind will vote for rate hikes when expecting a rise in inflation. Same goes for economic rate; rate hikes will do no good. Maybe the feds will stick to this, and stave off further hikes till 2018.
The retention of interest rates led to appreciation in the value of the USD relative to other currencies and the rate of return on government debt has dropped as a result.
As the dollar strengthens, it is a show that sovereign debts denominated in the US Dollar will continue to witness increasing patronage. The other effect is that dollar exports will become a notch costlier although short term effects might be neutral till next month or thereabouts.
Major Currency pairs
Forex deals will hit a boon with the increase in the value of the dollar relative to other currencies at the moment. If the feds increased interest rates, you can be sure that USD will be bought across board by traders in order to reap immediate gains. This leads to immediate fall in the rates of other currencies relative to the US Dollar.
Although no interest rate hike took place, the market reacted with a surge in the dollar, and this might be a nod to the standpoint of the feds that a hike is still in the offing.
The EUR/USD pair would only favor those who traded who traded short. The price movement favored such traders and the pips showed the way out.
The GBP broke through the 1.3650 level as at Wednesday, 20th September trading in a rather positive move for the fortunes of those holding out on GBP/USD.
While some traders are going long on this pair, they might be able to smile soon as the UK economy has weathered the Brexit storm considerably. Chances are that the rate could go 1.40 in no distant time.
As the USD strengthened against most emerging market currencies, the INR was not left out. It is expected that this will remain the position for the next few months unless there is a major disruption that is unexpected.
Holding out at 64.83 to the USD, the INR could slip towards the 66.00 mark by year-end.