“The economy is not ready for a rate hike”
This would be the summary of what happened the other day when the FOMC (Federal Open Market Committee) released its statement. It is also the main conclusion that Mrs. Yellen, Chairwoman of the Federal Reserve of the United States, gave at the press conference yesterday.
It was perhaps not that surprising, taking into account the weak 1st quarter growth and the mixed data we’ve seen so far. As a result, the dollar suffered across the board, with EURUSD ending the day comfortably above the 1.13 level while USDJPY was moving down all the way to the 122 area.
The most important statement of all, and the key one for the US dollar, was the fact that US economic growth was revised lower. This is important because any interest rate hikes will be gradual and data dependent. In other words, any potential rate hike in this year is not a certainty anymore as it will take one or two misses in the NFP (Non-Farm Payroll), for example, and market expectations will push the rate hike into 2016. There are already opinions from a respected few that say a September 2015 rate hike is highly unlikely.
One more thing was pushing the dollar lower. Mrs. Yellen stressed multiple times during her press conference, that any hike is gradual and even after a hike, the monetary policy is still ultra-loose.
After all, like Fed member Stanley Fisher said at the end of last month, a rate hike is a move from extremely loose monetary policy to easy monetary policy. In other words, a quarter of a basis point increase is not that much, and they are trying to communicate this as best as possible to market their intentions in order to avoid volatility.
Is avoiding volatility possible?
I would say not, and Mr. Draghi stressed the fact that volatility should be with us for the period to come at the last ECB (European Central Bank) press conference.
What’s next for the US dollar?
I would say a period of gradually moving lower will come sooner rather than later, especially against the commodity currencies such as the Australian Dollar (AUD) and Canadian Dollar (CAD). If traders are to find any value in an investment, then the medium to long rung commodities are a safer bet.
The Euro (EUR) is not that attractive right now with all the Greek drama. The problem, in the end, is that the whole amount Greece and its creditors are arguing about is less than half the amount the ECB is injecting monthly in the economy. What I am trying to say is that until a deal, if any, is done, the Euro will have a tough time rising.
How much will the EUR jump on an announcement of a deal? This is the moment when we will see the true value of the US dollar as EURUSD will be the barometer.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
