Analysis: Federal Reserve’s Rate Path Warrants More FX Volatility

The US Federal Reserve raised rates as expected, but there is much more to the rate hike.

The US Federal Reserve has increased interest rates at the regular meeting of the FOMC yesterday. The decision was widely expected by the markets, but it was the statement and Chair Yellen’s press conference that broadly affected FX volatility.

After the release of the news that the Fed is planning to increase rates three times next year and three times in 2018, the US dollar has sharply taken off. The greenback has rallied against pretty much every other major currency.

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Come Janet Yellen’s press conference, the EUR/USD was already flirting with 1.0570. After the sharp increase in the dollar index some more dollar sellers have chipped in to defend barriers, but their resistance was in vain as the post-election rally in the U.S. currency continued.

What did Yellen say?

Janet Yellen was particularly interesting to listen to this time around. There is rarely a change in government that doesn’t influence the Federal Reserve’s thinking. Despite the loud proclamation that the US central bank is independent, the hawkish tone of Janet Yellen has served to dispel the myth once more.

After the Federal Reserve’s Chair concluded speaking, her focus shifted onto fiscal policy. The US dollar bulls were carefully looking for more positive signs and that is exactly what they got. An upgraded economic assessment and encouragement on tax policies and restriction on fiscal spending were enough to derail the USD’s counterparts.

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Foreign exchange volatility is on the rise and the Federal Reserve’s rate path is seen improving further by some analysts. Even industry favorite Swiss National Bank’s President Jordan stated: “The U.S. Fed hike is good not just for Switzerland, but for other countries in general.”

Barclays Research writes: “We believe the current forecasts, including the “dot chart,” do not incorporate any major policy changes on the part of the incoming administration. Three rate hikes are indeed possible, only if the new administration does not enact tariffs or other trade restrictive policies in the first months of 2017.”

Fed is in the Lead

With all said and done, the Federal Reserve’s rate hike path hinges on the decisions that the Trump administration is going to take. The potential for deregulation of the financial industry and the repeal of Dodd-Frank is firmly boosting prices of major US banks. The Trump rally has taken off and does not seem to be abating for the time being.

Only substantial setbacks by the Trump administration could lead to renewed concerns about the global economy and consequently a reversal in the dollar’s fortunes. While some analysts are worried about protectionist measures, we could argue that it is protectionist policies that can boost the dollar even further.

With all the enthusiasm, we have to remember that in December last year, the Fed argued that it could raise rates 4 times this year. The USD rally has stalled for some time and the move by the Fed is welcomed by traders and by the intermediary industry alike.

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