The FOMC did what it was expected to do and increased the interest rate by 0.25% to 0.75%. This is only the second time in 10 years that they raise the interest rate after having done the same last year. The surprise came in the fact that while they previously thought it would be appropriate to raise the interest twice during 2017, they now think that they will be able to raise the rates 3 times next year. This has also led to the overall expected interest rate in at the end of 2017 to be increased from 1.1% to 1.4%. The more hawkish projections come due to the solid performance of the US economy with GDP increasing, and also inflation which is picking up alongside a better labor market. However, we must bear in mind that we have been there before, only last year the FED expected to raise the interest rate 4 times this year, and we are left with only 1 quarter point hike in the end.
The reaction in the markets was as was to be expected, as the FOMC was a bit more hawkish, so we saw the USD strengthen significantly, gold moved down as did indices alongside bonds. This move continued later on during the press conference when FED Chair Yellen made it clear that according to the FED, fiscal stimulus is not needed anymore to support the labor market as it is near full employment, again making the policy divergence between the US and other countries larger – rising interest rate and no stimulus, versus other countries that have lowered their interest rate and / or increase or still have broad stimulus programs.
Currencies
EUR/USD – dropped sharply to hit the support at the 1.046 level, which is also the lowest level since March 2015. If we drop below the 1.04611 level we will have reached the lowest level since January 2003, almost a 14 year low! The chances that we will indeed reach this level in the near future are quite high if we look at the policy divergence between the FED and the ECB.
USD/JPY – with the help of the FOMC statement it was able to finally break through the resistance and keeps on moving higher. The next resistance can be found around the 118.62 level, but it is likely that the 120 level will be more of a test, also because it is a psychological level.
GBP/USD – was able to move higher again due to slightly better employment data at first glance, but with the US interest rate rising and also the prospects for 3 instead of 2 hikes in 2017, we saw the GBP give up its gains very rapidly. We have seen that the GBP was able to be fairly resilient in recent weeks when the USD strengthened, but that was not the case yesterday. Today we will have the BOE rate decision, but more focus will be on the outlook and the minutes from the meeting.
USD/CAD – the FOMC meeting came just in time as we were dropping below the support at the 1.312 level, also the decline in oil price, but especially the strength of the USD was able to cause a sharp move up all the way to the resistance just below the 1.33 level.
AUD/USD – as the employment data out of Australia was pretty good, we saw the drop that was caused by the FOMC statement halted and was able to move slightly up. The number of people that were added to the job market grew at a solid pace and also the participation rate went up which is a good sign. However, the overall unemployment rate did go up slightly to 5.7%.
Indices
Dow Jones 30 – it looks like we will have to wait a bit longer to hit the 20,000 level as the Dow dropped due to the rising interest rate.
S&P 500 – dropped to the lowest level in a week in the aftermath of the FOMC rate decision and Yellen’s accompanying press conference, but is already moving back up again this morning.
Commodities
Gold – has dropped another $20 after the rate decision was made. Since October we have dropped already around $175 and it could very well be that more will be added to this.
Oil – while there was again a large discrepancy between the API data +4.7M and the EIA data of -2.5M, oil moved lower. It did spike higher when the data was released, but after sinking in and also looking at US production which increased by nearly 100K bpd to reach close to 8.8 mbpd it moved down. That caused oil to move lower already, and with the much stronger USD after the FOMC, there was even more pressure on oil. With the number of active rigs, which have shown a very steady increase, and also oil prices which have increased in recent weeks, the expectation is that US production will continue to rise.
Stocks
Yahoo (NASDAQ:YHOO) – is again facing scrutiny after it once again has become victim of a hack and details of more than 1 billion users was compromised. This is the second major breach made public in 3 months, with the first one made public in September and involved 500 million accounts. This is obviously not good news for the company.