The US Federal Reserve Indicates 3 Rate Hikes in 2017

Following are currency forecasts, analyses, and reactions to exchange rates for Euro, British Pound, and US Dollar for Federal Open Market Committee (FOMC) meeting to determine policy.

The US Federal Reserve delivered a 25 point rate increase, as widely anticipated by industry analysts, resulting in the dollar strengthening against all important currencies. The FOMC also signalled that there would be three additional rate hikes in 2017, as against the two that most people expected.

The foreign exchange market subsequent to the Fed’s actions and indications are:

  • The Pound to Euro rate climbed 0.21% to touch 1.19375
  • The Pound To US Dollar exchange rate dropped 0.79% to reach 1.25612
  • The Euro To US Dollar rate dropped 1% to touch 1.05224

Lloyds sent a brief to its clients regarding Fed Chair Janet Yellen’s statement regarding future economic stimulus. It pointed out that the USD climbed not just because of the Fed rate hike but also the proposal to increase 2017 hikes from two to three. There are expectations of a strengthening of jobs growth as well as inflation to reach its stated 2% target. The Chair also indicated that targets could be achieved without the help of fiscal stimulus.

The FED Preview

The forex trading markets have taken a 25 bp rate hike into account. Even so, the markets will be looking for indications of any changes in rate hike projections.

The FED policy meeting is available to be viewed on YouTube and also the Federal Reserve website.

Scotiabank released a brief that recommended buying USD even in the event of disappointing news from the Federal Reserve. It termed the Fed’s message as dovish given that there would be some economic uncertainties in the future. It said that US economic prospects would remain stronger than those of other developed countries given the growth rate of its economy and its fiscal policies.

Rate Hikes to Increase Gradually

The US Federal Reserve has changed its economic projections over the past few months in responses to many factors. Janet Yellen has indicated a slow increase in rate hikes in order to avoid shocking the economy.

Donald Trump’s Statements Will Be Closely Followed

President Elect Donald Trump has been very vocal in his criticism of the Federal Reserve and of its Chair throughout his election campaign. As a matter of fact, industry watchers are following Trump on Twitter to gauge his responses. Donald Kohn, a Brookings Institution senior fellow and formerly vice chair of the Federal Reserve, said that it is important to keep an eye on statements from Trump and other members of the administration especially if they don’t comment in public.

How Will Foreign Exchange Markets Perform?

Morgan Stanley anticipates that the US dollar’s upward movement will slow down during the second half of December unless there are new triggers.

Nomura securities analyst Yujiro Goro opines that the dollar would be affected by higher oil prices and increased tolerance for risk.

BK Asset Management executive Kathy Lien said that a 1 – 2% correction could be possible if the market doesn’t believe that rates will move upwards during the first half of 2017, with USD/JPY losing the maximum.

Bank of America Merrill Lynch foreign-exchange strategist Shusuke Yamada said that the Dollar rally against the Japanese Yen would plateau soon and result in a correction to touch ¥110.

Overall, A Positive Outlook!

It seems unlikely that Yellen will make statements that can spook the markets. In fact, the industry as a whole will react calmly to all announcements by the Fed. It also has to be seen whether Donald Trump will be able to live up to his promises of revitalising the economy.