Market Review: UNITED STATES FOMC INTEREST RATE DECISION
Economic calendar (highest volatility): 11th September – 14th September 2018:
Fundamental: This month, the United States (U.S) Federal Open Market Committee (FOMC) is expected to raise interest rates, bringing up the benchmark rate to a forecasted 2.25% from the current 2.00% level, in view of the tone of the regulators suggest that two more U.S Interest Rate hikes are likely to take place this year. This will bring about sustenance in the U.S Dollar's (USD) value and avoidance of a 'sell on fact' currency play, as the formerly vague expectations for four Interest Rate hikes to take place this year has now been largely reaffirmed. The USD fell on a Friday-to- Friday basis to close at 94.22 with investor flows being diverted from the greenback to other currencies including emerging market ones amid an ebb in U.S.-China trade war concerns. In the latest chapter of the heated U.S.-China trade dispute, Trump announced 10% tariffs on US$200 billion of imported China goods starting September 24, ratcheting up to 25% in January 2019, thus setting the stage for reprisal tariff by China on U.S. goods worth US$60 billion. While Trump also threatened duties on about US$267 billion more if China hit back on the latest U.S. action, China has also filed a complaint to the World Trade Organization against the U.S. planned import tariff on US$200 billion worth of Chinese goods and has declined to participate in this week’s trade talks with the U.S. The team here at FintechFX view that Trade wars could be a hindrance to the USD's strength moving forward.
Furthermore, the team here at FintechFX view that political risk related issues might deter the rise of the USD as concerns for more aggressive retaliations out of China built in to the currency market, even though the USD was higher than most major pairs this week as the market saw that the U.S. would be better equipped to weather a slowdown in trade than other major economies. Worries of escalating trade wars with neighboring countries like Canada could be a longer-term negative for the USD as currency markets in general, do not favor any forms of trade intervention. Negotiations between the U.S. and Canada are still underway as the two parties seek to come to an agreement on the future of the NAFTA, but negotiations remain hung up on the dispute resolution mechanism as well as on Ottawa’s strict control over its domestic dairy market, which Trump has repeatedly failed against. Trade wars carry a major risk of escalation that could weaken investment, unsettle financial market and slow global economy.
This week in particular, there will be 'stronger than usual' USD volatility triggered by both the midweek U.S FOMC Interest Rate decision and Thursday’s second estimate for the U.S. second quarter Gross Domestic Product (GDP). Previously in June, the U.S FOMC increased Interest Rates by 25 basis points raising the benchmark Fed Funds rate to between 1.75% and 2%. Federal Reserve Chairman Jerome Powell had earlier indicated that the U.S might raise interest rates as much as four times this year and the Federal Reserve has since raised interest rates in March and in June. Therefore, the team here at FintechFX think that the next round of interest rate hike could happen as soon as this week while this Thursday's third and final estimate of GDP growth will be closely tracked by markets to gauge on the level of sustainability to continue increasing interest rates moving forward. The team at FintechFX will continue to analyze data related factors against the persisting 'protectionist' and 'geopolitical' concerns and the implications it would bring on currencies. Meanwhile, the Reserve Bank of New Zealand (RBNZ) will also be announcing their interest rate decision on Wednesday and will be issuing their Monetary Policy Statement on the same day.The team largely expects the RBNZ to keep rates unchanged at 1.75%, and if the RBNZ presents the market with dovish statements, a further fall in the New Zealand Dollar/USD can be expected.
Taking a slight recap on the USD/Canadian Dollar (CAD), the team here at FintechFX would like to highlight that the Bank of Canada (BoC) has raised its benchmark interest rates from 1.25% to 1.50% in July, bringing them closer to the benchmark rate of their neighbor, the U.S. The BoC also intends to raise rates in October, assuming a successful NAFTA deal is struck. Nonetheless, the team notes that a 'sell on fact' play was witnessed straight after reinforcing our views that the USD strength largely outweighs. In addition as of late, the CAD has largely been affected by the progress of the NAFTA negotiations with the U.S. With the possibility that talks between the US and Canada to update NAFTA could go on until October 1, which is the deadline for submitting an agreement to the U.S. Congress, traders will have the monthly GDP read for July to bring about substantial market volatility to the CAD during the week because GDP growth can produce inflation and any spike in inflation would trigger an acceleration of the pace of interest rate hikes by the BoC to keep inflation in check. While annual inflation surged to 3% in July but slowed to 2.8% in August, it remained close to the near seven-year high recorded in July, thus maintaining the possibility of another BoC interest rate hike at its October policy meeting which will in turn help the CAD advance. Therefore for the week, the team here at FintechFX view the USD/CAD to rise further.
While the Pound Sterling (GBP)/USD has recouped much of its post-Brexit losses in the recent weeks following the improved progress in Brexit negotiations, the GBP pummeled last Friday for fear of a no-deal Brexit. Following a statement by European Union chief negotiator Michel Barnier last week a Brexit deal could be struck by early November, in the latest Brexit development this week that focused on the EU Summit in Salzburg, the Summit appeared to have made little progress on Brexit after EU's Donald Tusk on Wednesday rejected PM Theresa May’s plan to use technological solutions to manage the border between Northern Ireland and the Republic, right after PM May herself rejected Michel Barnier's own proposal for managing the border. This has resulted in PM May announcing last Friday that the end result of the Brexit negotiations may be no deal. The team here at FintechFX views for a "buy on rumour" move to continue to develop pending the Brexit developments as the team is in the opinion that the GBP will rise under all Brexit scenarios so long as a no-deal outcome can be avoided. Upbeat economic data has also contributed to the bullish GBP momentum, although next week’s indicators may not be as positive and could fail to provide support for the GBP in case the Brexit negotiations were to break down. While we already know the monthly number for July, this final release of the U.K.’s second estimate of GDP growth for the second quarter will be watched to provide a broader outlook on the economy.
Source (Charts): https://www.investing.com
Source (Economic Calendar): https://www.forexfactory.com/calendar.php
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