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US Fed hikes 25 basis points to 1.25%

BY SHAMEEM MUSA

The Australian dollar rallied overnight to a 2-month high of 0.7635 against the US Dollar. The US Federal Reserve raised interest rates by 25 basis points to a range of 1% to 1.25%, a level it hadn’t reached since the Global Financial Crisis. Looking ahead today, all attentions turn to May employment figures at 11.30am AEST with the expectations the unemployment rate will to remain steady at 5.7% and 10,000 new jobs added in the month. The AUD/USD pair is currently trading at 0.7585. We now expect support to hold on moves approaching 0.7550 while any upward push will likely meet resistance around 0.7600.

The New Zealand dollar enjoyed mixed fortunes through trade on Wednesday enjoying strong gains before paring early advances and closing the day only marginally higher. Having edged upward throughout domestic trade the Kiwi surged through 0.7250 and 0.73 following softer than expected U.S retail sales and month on month inflation data as investors rushed to correct positions ahead of the Federal Reserve’s monetary policy statement and rate announcement. Touching intraday and 3 month highs at 0.7319 the NZD then gave up gains and moved sharply lower in the wake of Fed commentary. The open market and rate setting committee’s hawkish undertone and upbeat assessment helped the greenback claw back losses and forced the NZD back below 0.7250 as investors adjust their expectations as to the timing and pace of monetary policy normalisation. Attentions now turn to this morning’s Domestic GDP data as a marker for further direction. A strong read could encourage another assault on resistance at 0.73/7320 while a soft read will likely consolidate the correction and push the NZD back toward the 0.71 handle.

The cable retracted it’s gains yesterday to trade this morning at 1.2749 following a high of 1.2815 during the US trading session. The Fed’s Chairwoman Janet Yellen took the wind out of the Sterling’s sails by presenting a hawkish tone in the FOMC statement. Despite this setback the GBP shows signs of recovering from the election with the possibility of a ‘softer’ Brexit, an element in the support for the GBP. On the domestic front all eyes now turn to the Bank of England’s Policy Summary as the surprising inflation rate growth earlier in the week may prompt a hawkish undertone. Against the AUD, the Sterling has remained relatively stable treading water at 1.68. The GBP/AUD cross turns to the Australian unemployment rate and the Bank Of England’s releases for further direction. 

In the overnight session the Euro leaped to its highest level in more than eight months against the Greenback touching levels of 1.1294 against the U.S Dollar. Weaker than expected economic data out of the US caused the immediate rally, Retail Sales fell last month by 0.3% and May Inflation data showed a decline in headline CPI by 0.1% and weaker than-expected core CPI down 0.3%. The main source of deflation is coming from used vehicles, new vehicles and apparel. Pretty much all gains were reversed as the US Federal Reserve raised interest rates by 25 basis points from 1% to 1.25% - the third consecutive quarterly increase. The Fed mentioned in their statement that the labour market continues to strengthen and that economic activity has been rising moderately so far this year. Also, plans to unwind its enormous bond portfolio bought as part of its bid to restart the US economy after the recession. Questions now turn if this will be the last hike for a while until we see a reversal of recent weakness in inflation and retails sales.