FX market outlook

FX market outlook

Dollar extends rally to fresh 10-month high against yen after Fed hikes rates.

The US dollar surged to a 10-month high against the yen as markets reacted to the news that the Federal Reserve raised interest rates and revised its forecast for next year’s pace of rate hikes. The Fed’s move indicated its confidence in the US economy and its belief that labour market conditions are tightening.

The FOMC decided to lift the Fed funds rate by 25 basis points to a range of 0.5 to 0.75 percent after a  two-day meeting and made the announcement on Wednesday. This increase was already priced in by the markets but what was a surprise was the projected pace of rate hikes for 2017. The Fed forecast three rate hikes next year rather than the two that was expected and this surprise boosted the dollar.

In a press conference following the FOMC announcement, Fed Chair Janet Yellen said she believed inflation was moving in the right direction and towards the Fed’s 2 percent target. Yellen did not show concern for the strength of the dollar.

The greenback gained against most of its major counterparts except against the aussie which was quite resilient due to stronger-than-expected job gains in Australia.

The US dollar index hovered at a near 14- month high while gold came under pressure due to the broadly stronger dollar. The precious metal fell to its lowest since February to $1134.64 an ounce.

The USDJPY pair hit a fresh 10-month high in Asian trading to reach 117.83 yen.

The euro tumbled soon after the FOMC decision and fell from above $1.0600 to reach a session low of $1.0467 in Asia today, the lowest this year.

Sterling slid from a pre-FOMC high above $1.2700 to drop to $1.2512 in Asian trading today. The next risk event for the pound will be today’s Bank of England policy decision.

The Australian dollar restrained its losses against the US dollar after data showed Australian employment proved surprisingly strong in November. The aussie jumped from a pre-data low of $0.7382  to a session high of $0.7429. The Australian economy added 39,100 jobs in November, outpacing forecasts of a 20,000 gain. October’s report was also revised upward to show an increase of 15,200 positions.

Oil was lower today as investors rotated out of commodities into the more favourable US dollar. WTI oil added to Wednesday’s losses and slid to $50.65 a barrel and Brent crude fell to $53.55 a barrel in today’s Asian session.

The highlight for today will be the Bank of England policy meeting. The Swiss National Bank also meets today. In terms of economic releases, markets will focus on Eurozone PMIs, UK retail sales and US inflation data. Jobless claims numbers out of the US will be closely watched.