Daily FX market outlook

Daily FX market outlook

Dollar weakens, gold rallies as Fed sees no rush to hike rates.

There was broad dollar weakness during Asian trading on Thursday which followed through from the late US session when the greenback softened after the Federal Reserve’s decision to delay a rate hike.

The FOMC concluded a two-day meeting on Wednesday with a decision to hold the federal funds rate unchanged between 0.25%-0.50%. While the Fed was in no rush to hike rates in September it did however suggest that further rate hikes were to come soon and gave strong hints that December was very much in play. This was also indicated in the Fed’s Dot Plot.

The Fed’s rhetoric left the option open for one more interest rate increase this year but they projected a less aggressive hiking cycle for the next two years. There was a change in the language the Fed used in its statement which suggested there must have been some division among policymakers. This was evident since there were three dissenters. Voting members Esther George, Loretta Mester and Eric Rosengren were against holding rates and voted to raise rates by 0.25%.

While the Fed was mostly optimistic about the health of the US economy, there was strong debate on the timing of the next rate hike. The economy is not growing as fast and there is no real inflation pressure. The Fed has missed its 2% inflation target for eight years and currently inflation still remains below it. So the risk of hiking too much too soon gives downside risks to the economy.

Soon after the Fed policy announcement, US equity markets rose while the dollar fell. The greenback held losses in Asia, trading down to 100.09 yen, the weakest in almost four weeks. The US currency was already weakening ahead of the FOMC decision due to the yen gaining strength after the Bank of Japan policy meeting on Wednesday. There was some skepticism in the markets over the changes the BOJ made to its monetary policy. It left interest rates unchanged at minus 0.1% but it abandoned its policy to expand its monetary base and adopted a “yield curve control” under which it will buy long-term government bonds to keep 10-year bond yields at around 0%.

Most major currencies gained against the dollar after the Fed policy announcement. The euro climbed to $1.1200 and sterling reached an Asian session high of $1.3057. The Australian dollar extended gains to $0.7650. The New Zealand dollar fluctuated against the US dollar after the RBNZ left interest rates on hold at 2% today. The kiwi last traded at $0.7330 in late Asian trading, lower than the session high of $0.7344. The RBNZ signaled that further rate cuts will be needed in order to move inflation toward its 2% target.

In commodities, gold moved higher after the Fed decision to reach a high of $1336.81 in Asia. Gold is sensitive to interest rates and tends to gain when the US dollar weakens, due to the inverse price relationship between the two assets.

Oil prices rallied after data on Wednesday showed US crude oil inventories fell by 6.2 million barrels last week. WTI futures rose to the highest in a week at $45.86 a barrel while Brent crude climbed to $47.33 a barrel. An OPEC meeting in Algiers is less than a week away and there are hopes that major oil producers will reach an agreement to freeze output levels.

Key economic data to focus on later today include Eurozone consumer confidence, US jobless claims and US existing home sales. There will also be speeches from ECB President Mario Draghi and Bank of England Governor Mark Carney today.