The U.S. Federal Reserve has decided to raise interest rates by another quarter percentage point to a range of 1% to 1.25%. This rate hike, though largely expected marks the second rate hike in three months. Interestingly, the news of the rate hike is having a ripple effect flowing through the economy and with special effects in the forex markets.
The USD has not had a particularly impressive performance in the forex markets in the last couple of weeks as a number of political and economic factors kept the greenback subdued. However, it appears that the USD is heading back into winning ways as we prepare for the second half of the year.
The USD seems to be heading back to winning ways against a backdrop of increased bullish sentiment in the U.S. economy. Masafumi Yamamoto, chief currency strategist at Mizuho Securities observes that “the dollar now seems to be getting over its shock from the core CPI release… It will be increasingly difficult to short the dollar.”
Forex round up by the numbers
In the week ending, June 16, the greenback is building up momentum to end the week on a high note. To start with, the dollar index, which tracks the USD against a basket of six rival currencies was up 0.1% to end the week at 97.474, and to score a weekly gain of 0.6%.
The USD also booked decent gains in specific currency pairs. For instance, the greenback was up 0.2% to 111.11 against the Japanese Yen (JPY) and the USD is gearing up to score 1% weekly gains against the USD. One of the reasons behind the dollar’s strengthening against the JPY is the fact that economists expect the Bank of Japan (BOJ) to maintain its easy monetary policy. The BOJ has hinted that it won’t follow the footsteps of the U.S. Federal Reserve to raise interest rates.
The USD didn’t particularly score material gains against the pound sterling (GBP) as a change in the Bank of England (BOE)’s interest rate policy. However, sustained anxiousness about the outlook of the UK economy is giving the USD an edge over the sterling. Investors are worried about a hung parliament, Brexit negotiations, and a case for weaker economic growth. The pound is down 1% against the USD at $1,2471 as the week draws to a close after losing 3% against the USD last week after the parliamentary elections.
The Euro would have succeeded in remaining unchanged in response to the Fed’s decision to raise interest rates – after all, forex traders have largely priced in the possibility of a rate hike into the markets. However, economic news coming out of the Eurozone is shaping up to be a drawback for the prospects of the EUR in the forex markets. As the week ends, the EUR/USD pair is trading at 1.1170 after the Eurozone trade surplus declined massively to EUR19.6 billion.
The People’s Bank of China (PBOC) is tightening its grip on USD/CNY but the prospects of strong U.S. economic growth is boosting the outlook for the USD in the forex markets. The Yuan declined by 6.5% against the USD last year but it is already up 2% against the greenback this year. The PBOC is supporting the Yuan as China’s commercial banks sold a net $17.1 billion of foreign exchange in May to mark the highest volume of forex sold since January.