Morning Commentary: The Fed Steps into the Batter’s Box

Foreign Exchange - Morning Commentary

The Fed Steps into the Batter’s Box

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Markets have been hovering around awaiting today’s Federal Reserve announcement with the exception of the U.S. interest rate market. While U.S. interest rates have been marching higher over the past month, the U.S. dollar has actually weakened from one month ago which is an unusual phenomenon. Part of the explanation for the weaker U.S. dollar is the emerging market sector stabilizing and removing, in the short term, the potential for contagion to other segments of the market. Markets are anticipating, with nearly 100% certainty, that the Fed will move for the eighth consecutive time today and raise rates another 25 bps to 2.25%.
To step back a bit and put some perspective on where we are historically in this Fed rate hike cycle is important. U.S. 2-year interest rates have been on a steady march over the past three years and are now approaching levels not seen since ten years ago. In the last most prominent Fed rate hiking cycle, the Fed raised interest rates 17 consecutive times over a two-year period from 1% to 5.25% from 2004 to 2006. From that perspective, we still have a long way to go.
While interest rates remain historically low and the U.S. economy continues to remain exceptionally strong, markets continue to anticipate another rate hike in December with some economists forecasting four more rate hikes in 2019. Our history is littered with economic recessions that came from unexpected sources and warning signs that even the brightest and sharpest economists on Wall Street and Fed officials missed. We are in one of the longest economic expansions in our history; it would seem that we are approaching the end of this rate hiking cycle and the Fed needs to step back for a bit.
The Fed announcement comes at 11:00 PST with Chairman Powell’s press conference at 11:30; this will be a critical day for the markets and the U.S. dollar.
  • The Czech Central bank raised interest rates for the third time today to 1.50%. In the post-meeting commentary, the head of the central bank watered down the possibility of further rate hikes through year end. The Czech koruna is weaker against the U.S. dollar and weaker against the euro since the announcement.
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