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USD Rallies on Hawkish Fed Comments

Published December 15, 2016
  • Janet Yellen and the Federal Reserve delivered yesterday with their expected rate hike, but they also surprised the markets with a plan to raise the rate three more times in 2017
  • The market had originally only priced in two rate hikes for next year, however, Yellen insisted that this change was only a very modest adjustment and that the Fed was not behind the curve
  • Yellen also mentioned that yesterday’s decision was a vote of confidence in the US economy and commented that the labour markets have continued to strengthen while making progress towards their inflation goals
  • Further comments indicated that the Fed could not accurately price in Trump’s ambitious fiscal plans, though it was clear that these political changes had been taken into account for the 2017 forecast
  • The US Economy continued to benefit from a slew of positive this morning; Consumer Price Indices remained stable, unemployment rates improved, and Manufacturing Indices showed robust growth
  • As a result, the US dollar rose to 14-year highs against other major currencies as the USD Index hit its highest level (102.62) since January 2003
  • The Euro fell to its lowest level against the USD since March 2015 as investors speculate whether the EUR/USD can reach parity due to highly divergent monetary policies and economic performances of the Eurozone and USA
  • The Euro, however, found support on the back of positive Purchasing Managers’ Index data from France, Germany, and Eurozone as data indicated that a recent manufacturing upturn contributed to growth in lieu of a slowdown in the service sector
  • Governor Poloz and the Bank of Canada will release its biannual Financial System Review this morning at their press conference at 11:15 AM; the BoC will also comment on growing household debt levels and real estate vulnerabilities in the Canadian market
  • U.S. oil prices are down nearly 5% since the beginning of the week after rising U.S. crude inventories renewed concerns of a global oil supply glut

Chart: (1) US Dollar Index since year 2000