There’s No Stopping the Dollar Today – What Did the FED Do Yesterday?
The US Dollar bulls launched their latest assault yesterday right before the FED meeting began and they´re not showing any signs of fatigue yet. EUR/USD took out 1.05 yesterday, while today we saw the last support level at 1.0460 give way. Shortly after that, the 1.04 level was broken as well. The biggest loser though was the Japanese Yen, which has lost nearly 400 pips during the last few trading sessions.
But, why all this USD buying spree? The FED did the same thing last December but the USD ended up lower against most forex majors after a short-lived rally. We have seen that happen to the other currencies after every time a central bank cut/hiked the interest rates. We did mention yesterday that the NZD surged after the RBNZ (Royal Bank of New Zealand) cut the interest rates a few weeks ago.
As I explained there, the forex market used to anticipate the next forex event (rate cut/hike, the start of QE etc) before, but only after the current event was milked dry. What I´m saying is that if the ECB cut the rates today, the Euro would fall for days and weeks before the attention of the market shifted to the next major event.
This year though, the market forgets about the current forex event minutes after it is over, hence the rally in NZD after the NZD rate cut and the massive rally in the Euro pairs after the ECB went negative on rates last year as well as increasing the size QE programme.
That said, this latest USD surge is the odd move this year. Why isn´t the Dollar reversing? Why is the market istill concentrated on yesterday´s rate cut and not on the next major USD event?
Well, I think that the forex market behaviour is still the same as a few weeks or months ago. The market is already over the rate cut yesterday and concentrated on the next major event, but all major forex events point up for the Buck, that´s the reason the USD bulls are still pushing higher.
The FED dot plot shows three interest rate hikes in 2017, but I don’t think this is the reason for the rally because again, last year´s dot plot showed 3-4 rate hikes this year and we know how this year ended, with just one rate hike. The main reason for this rally in my opinion, is the hawkish FED.
You know, the FED and Yellen have been dovish for so long that the market took it for granted; it had fallen into a lethargic state of mind thinking that the FED would remain dovish forever. The FOMC statement yesterday was far from being overly hawkish, but the FED acknowledged the improvement in the economy and with Trump´s fiscal plan on its way the monetary policy has to tighten up.
The FED statements have mostly been bearish, particularly the one which accompanied last December´s rate hike. This is the first hawkish statement with a hawkish tone which comes along with a rate hike. Well, that´s as hawkish as a central bank gets and that´s why the USD is still climbing. How far will it stretch? We have to take another technical and fundamental look before coming up with some answers.
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