Monday, 21 August, 2017

Dollar gains as Fed sticks to guns on policy tightening

US stocks stocks fall Federal Reserve Bank of America Merrill Lynch New York Stocks march on as Fed rate hike looms, dollar steady
Debra Rodriguez | 18 June, 2017, 02:22

"We could put this into effect relatively soon", Fed Chair Janet Yellen said at a press conference in Washington, a comment that caused longer-dated Treasury yields to rise from low levels earlier in the trading day.

Meanwhile, USD/CAD advanced 0.32% to trade at 1.3287, pulling further away from the previous session's more than three-month low of 1.3163.

While Wednesday's Eurozone industrial production and employment change reports came in better-than-expected, they were not influential enough to boost the Euro outlook.

While most of this week's Eurozone inflation stats have met projections, France's disappointing drop in inflation on Thursday will keep investors anticipating Friday's inflation stats for the overall Eurozone bloc.

The Fed decision and communique did little for long vega trades, with one-month implied volatility in euro-dollar dropping to its lowest level in nearly three years.

The Fed amassed the securities in three rounds of so-called quantitative easing, or QE, meant to stimulate U.S. investment and hiring in the wake of the 2007-2009 financial crisis and recession. When Wednesday's US inflation data from May was published, the US Dollar briefly plunged. European bonds tracked the move in Treasuries on Wednesday, with the yield on benchmark United Kingdom bonds rising three basis points to 0.95 % and those of French and German peers increasing five and three basis points, respectively. Analysts had forecast that U.S. inflation would slow from 2.2% to 2% year-on-year and from 0.2% to 0.1% month-on-month.

On Wednesday, the dollar index (.DXY) barely budged as slightly firmer moves against the euro (EUR=) and yen (JPY=) were offset by losses against the commodity bloc of currencies, such as the Australian and Canadian dollars. But the Fed maintained its forecast for three rate hikes next year. The Fed shrugged off the inflation data claiming that it was temporary but the market response indicated skepticism of these claims. Month-on-month inflation was projected to remain at 0.1% but instead dropped to 0%. This trend was in contrast to Treasury notes and two-year US Treasuries as investors priced in a rate hike from the FOMC later in the day. This is because analysts and investors are still uncertain about the likelihood of a third 2017 rate hike, with bets still below 50%.

If these beat expectations the Euro to US Dollar exchange rate could strengthen, but worse-than-expected inflation would have the opposite effect.

The Empire State manufacturing index climbed to 19.80 in June from -1.00 the previous month, compared to expectations for a reading of 4.00.

Thursday saw the publication of final May Consumer Price Index (CPI) results from France and Italy.

The euro, after earlier rising to its highest level against the dollar since November 9, was last little changed at $1.1215.

An announcement on Wednesday that U.S. President Donald Trump is being investigated by special counsel Robert Bueller for possible obstruction of justice also impacted risk sentiment in Thursday's early trade.

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