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11 Dec 2015
Unspectacular Fed rate turnaround? - Commerzbank
FXStreet (Córdoba) - The Fed rate rise next week is less exciting for the FX market, according to Thu Lan Nguyen, analyst at Commerzbank. He stated that more important for USD exchange rates is what will follow after the first rate rise. However, as there are unlikely to be any concrete signs of the next move on rates, USD exchange rates should also barely show a reaction.
Key Quotes
“The FX market will be closely watching the Fed next week. However, the first rate rise in nine years is less relevant for USD exchange rates than what the Fed announces in its accompanying statement and what Fed chair Janet Yellen says at the press conference. Market participants will be hoping for an indication of how the Fed will proceed, i.e. when the next move on rates will be.”
“Should US central bankers appear optimistic and thus signal a further interest rate rise soon, the USD would likely get another considerable boost before year end, as the market is only pricing in very cautious rate rises by the Fed at the moment. However, US central bankers will probably largely avoid making very concrete statements on the next rate move. They would then remain true to their line, emphasized time and time again, that every interest rate step will depend on the incoming data. In this case, there would be no grounds for market participants to rethink their cautious rate expectations already and the USD exchange rates would probably hardly react.”
“Consequently, the long-awaited US rate turnaround may turn out less spectacular than many had hoped and this is probably exactly what the central bank wants. After all, it is not in its interest to raise excessive rate expectations as this could allow the US dollar to appreciate sharply, which would in turn dampen the price momentum to an even greater extent. We therefore uphold our expectation of a moderate rate rise cycle alongside moderate USD strength next year. However, as it should be much more difficult for the market to correctly foresee Fed policy in this cycle (i.e. the pace of rate hikes) substantial fluctuations in USD exchange rates are to be expected at times in the coming months.”
Key Quotes
“The FX market will be closely watching the Fed next week. However, the first rate rise in nine years is less relevant for USD exchange rates than what the Fed announces in its accompanying statement and what Fed chair Janet Yellen says at the press conference. Market participants will be hoping for an indication of how the Fed will proceed, i.e. when the next move on rates will be.”
“Should US central bankers appear optimistic and thus signal a further interest rate rise soon, the USD would likely get another considerable boost before year end, as the market is only pricing in very cautious rate rises by the Fed at the moment. However, US central bankers will probably largely avoid making very concrete statements on the next rate move. They would then remain true to their line, emphasized time and time again, that every interest rate step will depend on the incoming data. In this case, there would be no grounds for market participants to rethink their cautious rate expectations already and the USD exchange rates would probably hardly react.”
“Consequently, the long-awaited US rate turnaround may turn out less spectacular than many had hoped and this is probably exactly what the central bank wants. After all, it is not in its interest to raise excessive rate expectations as this could allow the US dollar to appreciate sharply, which would in turn dampen the price momentum to an even greater extent. We therefore uphold our expectation of a moderate rate rise cycle alongside moderate USD strength next year. However, as it should be much more difficult for the market to correctly foresee Fed policy in this cycle (i.e. the pace of rate hikes) substantial fluctuations in USD exchange rates are to be expected at times in the coming months.”