Fed Raises Benchmark Funds Rate But Drops Language about 'Ongoing Increases'

On Thursday, the US dollar was on track to experience its longest losing streak in two-and-a-half years after the Federal Reserve hinted that it may end interest rate hikes, which investors believe are no longer necessary. In Europe, the focus will be on policy announcements from the Bank of England, Swiss National Bank, and Norges Bank.

  • The Fed increased its benchmark funds rate by 25 basis points as expected, but dropped the phrase "ongoing increases" and replaced it with "some additional" rises as it monitors how wavering confidence in banks may affect the economy
  • Traders have already factored in a 25-basis-point hike from the Bank of England
  • They are also anticipating a 50-basis-point hike from the Swiss National Bank, which will help the franc recover from the slide it suffered due to Credit Suisse's troubles
  • Meanwhile, Norway's central bank is expected to increase rates by 25 basis points to 3% to control inflation and strengthen a weakening currency that recently reached its lowest level against the euro since May 2020

Shift in Tone Points to Further Weakness for the Dollar

According to Brian Daingerfield, the head of G10 FX strategy at NatWest Markets, the Fed's shift in tone makes it less likely for markets to worry about strong economic data driving rates higher. He thinks that this suggests further weakness for the dollar since the ceiling for the Fed cycle has been lowered.

  • The dollar index, which measures the currency against six major peers, fell by 0.3% and was on track for its sixth consecutive daily decline, its longest losing streak since September 2021
  • In contrast, European markets see just under 50 basis points of further tightening, while futures imply a 40% chance of another quarter-point hike

As a result of the gap, the euro reached a seven-week high of $1.0930 and has risen for six consecutive sessions. Additionally, the pound hovered near a seven-week high after data revealed a surprise rise in British inflation, which increased to 10.4% and put pressure on the Bank of England to raise rates and sound hawkish at its upcoming meeting.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.

Credits

Photo by Giorgio Trovato on Unsplash.