So finally the Fed meeting on interest rate policy took place and the result was exactly what we expected: a no-hike decision but with a view to raise rates within the year and possibly as soon as next month. The Fed cited headwinds in the global money markets, namely Asian markets, and low inflation as the reasons behind their decision to hold the current policy unchanged but also hinted on a rate hike on any of their next meetings.
It is our assessment that the Fed will be debating a rate hike in every next meeting but we think that it might take more than one meetings for them to move forward. During Janet Yellen’s press conference the Fed boss mentioned that they would want to see improvements on the labour market before changing their rate policy and we would be surprised if one month of better performance would be enough.
In any case the Dollar lost ground after the decision hit the wires but this is nothing but the initial reaction of the currency on the back of the disappointment from the extra-bullish Dollar traders that bet in favour of a rate hike this month. In reality most investors knew that the decision would most likely be to wait hence we expect a slow burning rally for the Dollar in the sessions to come. Traders know that every new Fed meeting could be the know when they move forward and they would want to have already established their pro-Dollar positions.
In terms of price action over the past 24 hours, the Euro popped higher on the back of the Fed decision and hit the 1.1400 area with a high of 1.1440 as we predicted in our report yesterday. The reaction was not an extremely impressive one hinting that traders were more or less onto the fact that the Fed was not so likely to raise rates this time.
The really interesting question now is whether the Euro will be able to sustain these levels, with the Dollar expecting a rate hike in the next month or two and the Eurozone debating on whether to expand their easing program the outlook for the Single currency doesn’t look too favourable for the medium term.
The Cable on the other hand edged above the 1.5600 barrier after the Fed decision rallying more than 250 pips over the past few days on the back of Dollar’s weakness and better than expected UK reports. The currency shrugged off the bearish Retail Sales report but again the question now is whether the Pound can stand up to the Dollar that should start receiving incoming flows ahead of the expected rate hike by the end of the year.
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