Fed moves with baby steps closer to a rate increase

Demand for the USD was re-established on Wednesday when the Federal Open Market Committee (FOMC) released its latest monetary policy statement. And even though the tone of the report on the increasing likelihood for an interest rate increase was widely expected, the EUR/USD still endured some heavy selling-off.

The Federal Reserve (Fed) pointed out that the US economy looks more positive and reaffirmed that it is possible for the interest rates to be raised before the end of 2015. While all FOMC members agreed to keep the benchmark interest rates unchanged at the very low level of 0.25%, they also acknowledged that the world’s largest economy is on a recovery mode. But once again the U.S. policymakers remained vague about the timing of a possible rate hike, which reaffirms their reluctance to prematurely proceed with such a move.

Within its statement, the Fed said that the employment sector, housing market, and consumer spending have all improved and they are anticipating that the inflation rate will slowly progress towards the 2% target set by them. The unemployment rate in the U.S. is at 5.3%, the lowest level of the last seven years, and its recovery was acknowledged by the Fed. But within the same report, it went on to say that there has to be further improvement of the employment sector and it will wait for more indications that the inflation level is moving towards “its 2% objective” before interest rates are to be increased. The current level of interest rates has been for more than six years and the last time there was an adjustment was back in 2008 when the Fed moved with a gradual decrease from 2% to the current level (0.25%) in an effort to battle the global economic crisis.

In summary, the Fed has not moved from its previous position and views of the market and once again mildly pushed the markets towards expecting an interest rate increase during the year. However, USD bulls increased their confidence for a September rate increase and moved to sell the EUR/USD shortly after the release of the Fed monetary policy statement. Indeed, the world’s most popular currency pair moved with significant losses on Wednesday by 0.8% and backtracked from the 1.11 level reached at the beginning of the week down to 1.09805. It was a rather volatile week for the EUR/USD with significant upward and downward rate moves but it is worth noting that the overall shift was only by a tiny increase of 0.1%, and this is potentially a reflection of how indecisive the markets are towards the economic progress of both the U.S. and Eurozone.

Given the increased levels of uncertainty surrounding the U.S. dollar strength, many forex traders have been, for a long time, on the look out for the latest indicators of economic performance. Undoubtedly, the upcoming Nonfarm Payrolls (NFP) report – expected on Friday 07 August at 12:30 GMT – is of significant importance since the Fed heavily relies on the unemployment sector performance before deciding on whether to introduce a gradual interest rate increase. Hence, it is increasingly likely that the EUR/USD will remain sensitive on the upcoming NFP results on Friday.

The post Fed moves with baby steps closer to a rate increase appeared first on Forex.Info.

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