Analysis / Daily / Finance / forex / Money

Fed Puts Interest Rate Hikes in Play

The pound’s reaction to the budget yesterday seemed to air on the cautious side as the drop seen initially in sterling came to a halt as GBP/EUR fell through the 1.38 level and cable traded below $1.47. The FTSE reacted on the positive side led by the energy sector after Chancellor Osborne announced tax concessions for UK energy names. The Chancellor also upgraded UK growth forecasts in yesterday’s budget whilst cutting the inflation outlook for this year citing the slide in oil prices. The big move for the pound really came after the Fed’s meeting after the UK close which saw the dollar sold off, pushing GBP/USD up by a massive 3 cents to trade over the $1.50 handle, although some of this ground has already been lost. The pound also benefited as the euro was sold off after the Fed statement, pushing sterling closer towards the 1.39 handle.

The euro did initially get a massive boost overnight against the dollar after the Fed wrong-footed investors after it released its statement, sending EUR/USD higher to come close to hitting $1.10, but nearly all those gains have now disappeared and it is a case of as you were, with currency levels around $1.0630. The dollar, which had been on a months-long tear against the euro, saw its biggest drop against the common currency in six years. Against sterling we have seen some recent gains also lost as the currency pair trading well over the 1.39 handle.

The dollar was higher against the yen and the euro in Asian trade Thursday, with the U.S. currency regaining some ground following falls after the Federal Reserve surprised markets with its dovish tone. The dollar was at ¥120.53, compared with ¥120.09 late Wednesday in New York. The euro was at $1.0775 from $1.0862. The Fed wrapped up its two-day policy setting meeting Wednesday and dropped from its statement a pledge that it will be “patient” before raising rates as had been widely expected. What surprised investors was the Fed’s downbeat outlook for U.S. growth and inflation estimates, as well as for interest rates over the longer term. During Asia trade, the greenback was weaker early in the session, tracking an overnight selloff that set the dollar into tailspin to ¥119.29–its lowest since Feb. 27. Then, dip buying kicked in to bring the dollar as high as ¥120.48 midday. The dollar may continue to face selling pressure over the short term, as it took a breather from its upward path in the wake of the dovish FOMC outcome.

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