Trump: We're finished with rate hikes,bye - Powell: Just one last time for Christmas!

Market Consensus Heading into the FED Meeting Today

Posted Wednesday, December 19, 2018 by
Skerdian Meta • 2 min read

The FED is holding its last meeting this evening and they are expected to hike interest rates one last time for the year. The FED increased interest rates in September from 2.00% to 2.25% and today they are expected to increase them by another 25 basis points which would take the rates to 2.50%. But, instead of going up in anticipation of the rate hike, the Buck has declined considerably this week as we approach the meeting.

That seems strange since the US economy is the only one that has been running on four cylinders this year, while the other major developed economies as well as the emerging markets have been slowing down considerably. So, what are the reasons behind this bearish move for the USD?

  1. Anticipation – The rate hike today has been widely anticipated and the USD has benefited from the tighter monetary policy and the idea of hiking rates for the fourth time in December has benefited the Buck. So, it has been priced in as we say in forex. Now that the last rate hike is approaching and will be over soon, some of that long USD trade is unwinding.
  2. Odds for Not Hiking Today – The odds for the Federal Reserve to hike interest rates today are pretty high. Although they never are 100%, there is a small chance that the FED might not hike the rates today. Even if the FED hikes the rate, that has been priced in, so it’s a win/win situation for USD sellers.
  3. The Path of Future Rate Hikes – FED’s Chairman Jerome Powell said in the last meeting that interest rates are close to neutral now. They have been accomodative before for the FED, but now the language is changing. This means that the FED might slow down the pace of rate hikes next year or even stop them at some time. This is bearish for the moment for the USD since traders are used to plenty of rate hikes after the FED has increased them 8 times in the last two years and this one will be the 9th.
  4. Donald Trump – Donald Trump hates when the FED increases rates because it makes it that much more difficult for the US economy to keep growing as fast as it has been growing this year. Trump Tweeted in the last two days about the mistake that the FED is making by hiking interest rates. He might tweet again about this today.

There are other less apparent and less important issues for the USD right now such as the yield curve inversion between the 2 and 10 year US treasury bonds, the slowdown in the global economy and the decline in crude Oil prices, which can cause inflationary pressures to weaken. So, there are quite a few reasons for the decline in the US Dollar this week.

But, the market is forgetting something. FED members might go and act the other way from what US President Donald Trump wants. They value independence and they might try to show that they don’t bow down to such requests. So, that is a big danger for USD sellers and one to keep in mind as we head into the meeting.

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