Federal Reserve Unable to Stem US Dollar’s Woes

The US Dollar continues to struggle despite the US Federal Reserve virtually assuring markets of a December interest rate rise.

The US Federal Reserve left interest rates unchanged last night, as expected.

The statement said that the case for a further rate rise “continued to strengthen”, hinting at the likelihood of a hike in December, even if there was no explicit reference to the “next meeting” as was the case prior to the December 2015 hike.

Only 2 members voted in favour of a rate hike this month as Rosengren sided with the majority, while Mester and George supported an immediate rate rise.

While there was no specific mention of a possible hike in December or the next few months, there was sufficient positive tweaks to the statement to keep a hike next month in play.

Fed Fund futures are now pricing in a 78% chance of a December hike up from 68% ahead of the statement.

Therefore the December rate rise is fully baked into the USD and it appears markets are already looking to the number of potential rate rises offered in 2017.

The Euro moved above 1.11 against the US Dollar for the first time since October 12th.  

The Pound moved to above 1.23 against the Dollar and trades at levels not seen since October 10th.

“Overall, the Fed is very likely to raise rates next month, but it has given itself room to back out if economic circumstances change or if there is an adverse market reaction to the election,” says a client brief from Lloyds Bank Commercial Banking.

The issue of US politics has become an important one for the foreign exchange markets with the initial reaction to the uncertainty that a tight race brings being negative for the US Dollar.

The quest for safety has aided the Euro which is always likely to benefit from risk-off conditions owing to the Eurozone’s large current account surplus.

However, this dynamic does not necessarily reflect a market distaste for Trump. Deutsche Bank’s Alan Ruskin says there are some parts of the Trump policy mix that would advocate for a stronger USD.

So beware the intricacies of trading the US Presidential election.