As many analysts anticipated, the U.S. Fed yesterday raised interest rates by a quarter of a percent for the second time since the election of President Trump. The decision is widely seen as reflecting growing confidence in the U.S. economy. The range of the federal funds rate will now fluctuate between 0.75% and 1%. Growth forecasts for 2017 were unchanged at 2.1%, but were slightly higher for next year at 2.1%.
The labor market has "continued to strengthen"
The Fed highlighted the strength of the U.S. labor market, which has recently improved significantly. Last Friday - as on the first Friday of every month - the U.S. Bureau of Labor Statistics published its latest employment report. Figures for February showed that job creation was better than expected at 235,000, while the unemployment rate fell to 4.7%.
As discussed in a previous analysis, this monthly report includes information about the overall employment situation in the United States. This offers insights into the relative strength of the American economy and how consumers intend to spend their disposable income. It also sheds light on the likely investment and hiring plans of U.S. companies, which will affect the country’s economic growth and rate of inflation. That’s why this report is important for the Fed.
The Fed is planning two further rate increases this year
No change in the pace of Fed Funds hikes is expected. The U.S. Central Bank is still likely to raise interest rates twice before the end of the year to prevent the economy from overheating due to rising inflation, and to the consequences of decisions taken by the U.S. government. However, the Fed preferred not to take stimulus projects such as tax cuts or infrastructure spending into account, since they have not yet been voted on.
USD weakens after the FED
A consequence of the fall of the USD could be rising commodity prices, which are negatively correlated to the value of the U.S. Dollar. When the dollar strengthens, it means that commodities become more expensive for people who hold currencies other than the dollar. This will have a negative impact on demand. Indeed, if the dollar strengthens against the currency of a commodities buyer, then he will have to spend more of his own currency in order to buy the same amount of commodities as before. They therefore become more expensive, demand decreases due to lower purchasing power, and prices fall. Conversely, when the dollar weakens, the price of commodities tends to increase, because any weakening of the USD stimulates commodities buyers with other currencies, which will increase their purchasing power.
According to a Bloomberg survey covering the period from 1990 to 2015, this negative correlation was observable in 60% of cases. Gold’s price evolution yesterday demonstrated this phenomenon, reaching its highest price for a week as the U.S. Dollar dropped. Gold is still going up this morning. After a correction phase (retracement of about 50% of the previous upward movement), Gold bounced back from the Ichimoku cloud.
The labor market has "continued to strengthen"
The Fed highlighted the strength of the U.S. labor market, which has recently improved significantly. Last Friday - as on the first Friday of every month - the U.S. Bureau of Labor Statistics published its latest employment report. Figures for February showed that job creation was better than expected at 235,000, while the unemployment rate fell to 4.7%.
As discussed in a previous analysis, this monthly report includes information about the overall employment situation in the United States. This offers insights into the relative strength of the American economy and how consumers intend to spend their disposable income. It also sheds light on the likely investment and hiring plans of U.S. companies, which will affect the country’s economic growth and rate of inflation. That’s why this report is important for the Fed.
The Fed is planning two further rate increases this year
No change in the pace of Fed Funds hikes is expected. The U.S. Central Bank is still likely to raise interest rates twice before the end of the year to prevent the economy from overheating due to rising inflation, and to the consequences of decisions taken by the U.S. government. However, the Fed preferred not to take stimulus projects such as tax cuts or infrastructure spending into account, since they have not yet been voted on.
USD weakens after the FED
A consequence of the fall of the USD could be rising commodity prices, which are negatively correlated to the value of the U.S. Dollar. When the dollar strengthens, it means that commodities become more expensive for people who hold currencies other than the dollar. This will have a negative impact on demand. Indeed, if the dollar strengthens against the currency of a commodities buyer, then he will have to spend more of his own currency in order to buy the same amount of commodities as before. They therefore become more expensive, demand decreases due to lower purchasing power, and prices fall. Conversely, when the dollar weakens, the price of commodities tends to increase, because any weakening of the USD stimulates commodities buyers with other currencies, which will increase their purchasing power.
According to a Bloomberg survey covering the period from 1990 to 2015, this negative correlation was observable in 60% of cases. Gold’s price evolution yesterday demonstrated this phenomenon, reaching its highest price for a week as the U.S. Dollar dropped. Gold is still going up this morning. After a correction phase (retracement of about 50% of the previous upward movement), Gold bounced back from the Ichimoku cloud.
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