On Wednesday, as expected, the US Federal Reserve raised interest rates for the first time in 2017, but the US dollar (USD) tanked as the market was not inspired by Fed Chair Janet Yellen’s unambiguous hawkishness.
The US Fed raised interest rates by 25 basis points but the USD sold off aggressively across the board as investors focused on the dot plot, Yellen’s vagueness and Fed member Kashkari’s dissent. In addition, the Fed upgraded its inflation, growth and employment forecasts, but officials still expect only one more hike this year, rather than two. The Fed Fund futures now price in a 46% chance of a June rate hike, lower than the over 60%, a day before. Yellen’s speech was largely positive and she even said that three rate hikes certainly qualify as gradual (albeit when pressed), but investors were not inspired when she said she felt that conditions have not changed much since December. She also said that she expects the policy to remain accommodative in the near future. Investors also noted that the decision to hike rates was not unanimous, with member Kashkari voting to leave rates unchanged this month. Aside from the FOMC, the US also released CPI and Retail sales data, all coming out better than expected, but this was still not enough to inspire demand of the greenback.
Meanwhile, the euro (EUR) soared as it took full advantage of the situation in the US as well as on the back of positive political headlines. The first two polls in Netherlands show that the Liberal party is comfortably ahead; this means defeat for Geert Wilders and his Freedom Party that was driving an anti-EU sentiment. A final confirmation will inspire euro bulls further.
In other currency news, the British pound (GBP) also edged higher, but experienced huge volatility throughout the day. The GBP initially surged higher on headlines that Nicola Sturgeon, the Scottish First Minister, would have a hard time advocating for an independence referendum. Jobless claims also printed -11.3, much better than the expected 3.2K, with the unemployment rate coming in at 4.7%, better than the expected 4.8%. But further gains were curtailed as the Average Earnings Index printed 2.2%, worse than the expected 2.4%. It would be a big day for the Queen’s currency today with the Bank of England updating investors on its latest monetary policy decision. The BOE is expected to keep rates unchanged, but investors will be keen on the accompanying rate statement.
All commodity currencies pressured the USD heavily. Crude oil prices drifted higher and lifted the Canadian dollar (CAD) despite US Crude Oil Inventories showing a build, while weak New Zealand GDP data did not weigh down on the NZD. Quarter on quarter New Zealand GDP printed 0.4%, weaker than the expected 0.7%. There is no major macroeconomic data set to be released from the commodity countries today, with their respective currencies expected to take their cue from the USD yet again.