The Effects of FOMC Gains: Friend or Foe of the Dollar?

Towards the end of June 2017, the dollar appeared to be somewhat in jeopardy as the Euro reached a two year high against it. Matters reached a head on June 26th when the yen spiked and the dollar seemed in danger of slipping like the sterling. Holding interest rates steady, the Fed kept the dollar stable for a time and then hiked rates in a bid to retain its dominance. Opinions are divided over the efficacy of the Fed’s actions, and here these divided opinions are explored in more detail.

Is there a big rate rise awaiting us in the next few months?

Rates have already risen four times this year (we usually expect there to be around 3 rate rises per annum). However, several heavyweight commentators, including Barclays, have predicted that we are heading for one further rate rise of 2017 in December. One of the key reasons why this is likely to be the case is that the Fed stated soon after the events of June 2017 that it was going to start to normalize its balance sheet right away. As a result, financial analysts predicted that it was no 50% more likely to hike rates one more time in the next few months. This rise is also predicted to be a dramatic, ‘hawkish’ one rather than a gentle and ‘dove like’ one. In fact, read any financial commentary article written after June 26th 2017 and you are likely to see the words ‘Fed’ and ‘hawkish’ coupled together with glib ease.

The reason for continued ambiguity over rate rises

Despite growing confidence in an imminent rate rise, there still remain some doubts. The key doubt is regarding the rate of inflation, which has been slowing since the middle of the year. Nevertheless, changes in inflation have not been big enough to change the field enough for the Fed to make new plans. A hawkish rate rise still appears to be the most likely option. Another key factor driving this uncertainty is in the makeup of the Fed board itself. There are five empty seats on the board at the moment, and one of them is none other than the Chair of the Fed. Until these seats are filled and we known whom we are dealing with and what their financial ideology is like, it will be difficult to predict with any certainty what is going to happen in terms of rate rises. The dollar has already been significantly weakened and destabilized due to the Trump administration and it is likely that the administration – which has a significant amount of clout in terms of deciding who joins the Fed Board – will press for candidates to be elected to the board who have policies that will weaken the dollar even further. Though commentators are waiting to see the final results of the balance sheet and also to scrutinize other significant documents such as the August CPI which is due to be released very soon, they agree that it is data regarding rate hikes that will be most influential in determining how the markets react for the final quarter of 2017.

What does this mean for traders?

If you use a binary options trading platform such as CMC marketsyou will be well aware that shifts such as this one in the financial climate can have a dramatic impact on the value and frequency of your trades. The expert advice at the moment tends to coincide on one clear point: now is a very good time to sell USD, and CAD too. If you trade with USD, using your binary options software to help you to focus on these assets right now – and especially before December when rates may well hike hawkishly – could help you to make the wisest decisions about your trades. In sum, though, keep your eye on inflation and on the new elections to the Fed Board as this will give you an inkling of what is to come.