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Market Reaction is Mixed as Participants Adjust to Yesterday’s Rate Hike from the FOMC

By OFX

Yesterday saw the US Federal Reserve raises interest rates as expected, taking its benchmark to no greater than 2.25%. The move was fully priced into the markets, so it was the statement, economic projections and press conference from Chairman Jerome Powell that drove moves in the greenback. The statement removed mention of the word “accommodative” when describing its monetary policy which indicates we are exiting emergency measures and approaching a time when rate hikes will no longer be necessary. The omission of this word saw the initial drop in the greenback with cable briefly jumping through 1.32 and EUR/USD coming close to hitting 1.18. After this knee-jerk reaction, the uptick in growth forecasts for this year and next and the expectation for future rate hikes from the FOMC (the “dot plot”) showing we are set for a December move and three more in 2019 saw the dollar gain.

US Fundamental this morning were softer as initial jobless claims rose to 214k and pending home sales fell -1.8% from a revision of -0.8%. Annualized pending home sales meet expectations of -2.3%. Today we have FOMC member Kaplan speaking followed by Chair Powell speaking again at 4:30 pm eastern time.

The Canadian Dollar diminished overnight to reach one-week lows following further concerns that Canada would be left out of ongoing NAFTA trade negotiations. Prime Minister Justin Trudeau addressed the issues in an appearance on Wednesday as they work towards an agreement that will include them in a deal between the United States and Mexico, due for soft deadline by the weekend.

Canadian dollar participants look towards Bank of Canada’s Governor Poloz’ speech this evening where he is due to speak at an Economic council dinner along with GDP figures for the month of July due for release tomorrow. The USD/CAD currently trades at 1.3034, support is seen at 1.2987 while key resistance is at 1.3071.

The Euro kept within a natural range in overnight trading, oscillating between 1.1730 and 1.1790. Initially supported by a less than hawkish FOMC statement, the Euro looked set to challenge 1.1800 but ultimately failed to hold its gains and fell from its position of strength. Opening this morning at 1.1678.

The hard-hitting news was the FOMC announcement and additional statement which held few gremlins for investors. The widely expected US rate hike to 2.25% did occur, and the statement remained relatively optimistic, although did omit the word ‘accommodative’ from the text. Markets took the removal of the word as a sign that the Fed sees the expected rate hikes as approaching neutral territory.

Traders will now look to today's economic calendar which sees ECB president Draghi and BOE Governor Carney deliver speeches before we get UK Q2 GDP and current account metrics on Friday.

The pound slipped 0.1% on Wednesday as markets remained cautious about Brexit negotiations between Brittan on the EU. Still trading above Fridays low of 1.3041, the GBP/USD opens this morning New York time at 1.3105 with GBP/EUR also gaining 0.2% on the day. Concerns that we might see another election seem to have dissipated after Prime Minister May pushed back on the idea when questioned on her way to New York.

Traders will now look to today's quiet calendar which sees ECB president Draghi and BOE Governor Carney deliver speeches before we get UK Q2 GDP and current account metrics on Friday. On the technical front GBP/USD seems relatively well supported around 1.3100 with any upside moves likely to be met by resistance at the 1.3200 handle.

The Australian Dollar has seesawed its way through the overnight and into the North American session, having initially opened around 0.7250 against the U.S Dollar, the pair edged up towards 0.7280 during Asian trade however as the European markets opened the pair was unbale to hold on and relinquished all those gains touching a low of 0.7220.

As we moved through trading regions and sessions, investors eagerly awaited the US Fed announcement. The AUD/USD pair jumped up from 0.7255 to 0.7307, the highest in 4-weeks once the Fed’s decision of raising interest rates to 2.00-2.25% was released, the third hike of the year. The Greenback was sold off quickly following the statement which could be due to some bets that the removal of the “accommodative” in the statement indicates less urgency for tightening. The odds of a December rate hike slipped below 80% after the announcement according to the CME FedWatch tool.

The New Zealand dollar was boosted yesterday morning by a positive outlook in the latest release of ANZ Business confidence levels for September. The headline moved from – 50.3 to a reading of -38.3 suggesting businesses are still pessimistic about the local economy as indicators remain weak, albeit moving in the right direction. The result was a move higher for the Kiwi, shifting from 0.6645 at open to 0.6680 off the release. Trade balance figures were released a few hours before and came in at a deficit of 1.48bn driven by an increase in the cost of oil and diesel imports. The release damped the Kiwi initially by ten basis points before its move higher following the release of ANZ business confidence levels.

As expected the Federal Reserve lifted interest rates by a further 0.25%, with investors digesting their latest statement, the NZD/USD remained volatile for an hour oscillating between 0.6695 and back down to eventually settle at 0.6660. The RBNZ kept interest rates on hold as expected at the benchmark rate of 1.75% as RBNZ Governor Orr hopes to continue their Official Cash Rate at these levels into 2020. With this news, the Kiwi saw a brief rally higher but nothing substantial in a busy 24 hours on the markets.

The New Zealand Dollar opens this morning at 0.6624 with most notably United States Final GDP and Core Durable Goods Orders due for release this morning.