Analysis: The Fed rate hike and the FX market

Kash Kamal, Senior Research Analyst at Sucden Financial provides a detailed insight into how the FOMC’s increase in US interest rates has been welcomed by those with a vested interest in capital markets.

Finally, investors welcomed the long awaited first hike in US interest rates yesterday as the FOMC increased rates by 0.25%, marking the first rate rise since 2006 and putting an end to the historically low rates that have persisted over the past six years. Market participants had priced in the expected Fed move for quite some time and equity benchmarks on the whole were encouraged higher after the initial kneejerk reactions.

The dollar index slipped back to test support at the 50 day moving average immediately after the decision as intraday moves attempting to gain a footing above 98.500 gave way to some short term profit taking.

However, after overshooting yesterday we’ve seen demand for the greenback push the dollar index higher, opening just below 98.650 and targeting 99.000 early on as investors digested Janet Yellen’s comments.

The additional clarity given by the Fed chair will continue to boost confidence in the US economy, and while policymakers expect a gradual path for the increase in the fed funds rate a cautionary note on inflation was given, another indication of the Fed’s ability to manage expectations with competent forward guidance. – Kash Kamal, Sucden Financial

The encouraging moves higher across global equity markets can be seen as a sign of a job well done for US central bankers, particularly Janet Yellen who after a shaky start to her tenure as Fed chair has managed to communicate the guidance to markets effectively.

After yesterday’s rate rise investors will be happy to be moving on from the anxious will they/won’t they outlook that has dominated sentiment over the past few months and after agonising over the Fed’s outlook for the best part of the year market participants are grateful that they can finally get back to the macro data.