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Fed First Rate Hike Dilemma and Its Impact on USD

The Fed left rates unchanged, pushing the USD lower. Fed Chair Janet Yellen's dovish stance did little to provide markets with any degree of confidence about a rate rise later this year. The China slowdown, emerging markets risks and a strengthening dollar were the key reasons given for the delay in the rate hike, but what has perplexed the financial markets is Fed nervousness in raising rates due to concerns abroad despite the strong domestic labour market. Also by not raising rates the Fed has just highlighted the fragile nature of global recovery, hence ensuring an elevated level of volatility in financial markets continues. 

Financial markets are currently pricing in a 50/50 chance for a rate hike in December, but it’s unlikely that the US Fed will be able to see any significant changes in economic data this year to alleviate its fears over slowing growth in China which makes us believe that a rise in US interest rate is likely to happen next year. The USD is falling fast and we believe that this is likely to continue over coming weeks before dollar strength returns. 

U.S. front-end rates are priced in for a minimal rate hike this year, so the short-term rates have limited downside, hence the USD may find support over coming weeks. However, while current financial markets volatility continues, short-end rates are likely to remain at low levels and USD is likely to remain weak.  

You can also view previous article “China's Slowdown to Dictate Central Banks Actions”