Fed remains cautious on raising rates

For yet another time the Federal Reserve (Fed) kept interest rates unchanged and at the same level of the last seven years that led to demand for the EUR/USD. Nine out of ten of the Federal Open Market Committee (FOMC) have backed the decision for the rates to remain stable at the ultra-low 0.25%, except Jeffrey Lacker who proposed for a marginal increase of 0.25%.

The Fed was quite transparent that they were concerned over the state of the global economy, and that pushed them not to proceed with a rate increase. The FOMC said within its statement that the recent weakening of the global economic and financial state might lead to subdued activity, that in turn might prevent inflation growth at least in the near term. A strong indication of the domino effects of a weakening global economy is the recent slowing down of economic growth in China and its stock market crisis, and so traders are worrying that this financial negativity could spread to the U.S. also.

During her scheduled press conference following the FOMC interest rate decision, Fed Chairwoman Janet Yellen admitted that the recent growth slowdown of the Chinese economy has been long expected due to their efforts to rebalance it. But she admitted that the main uncertainty revolves around the magnitude of that slowdown and whether it might be much larger than initially estimated.

There was a lot of hype prior to the release of FOMC’s interest rate decision last Thursday and investors were divided in to the ones who favoured the U.S. central bank to finally proceed with a rate hike and the ones who believed that it would remain at the same level. Despite the speculations, the Fed’s key measures that will largely affect its decision towards increasing the interest rates from the 0.25% level are the improvement of the labour market and inflation to reach the 2% level. U.S. inflation levels remain clearly under pressure because of the crude oil rate’s inability to end its downwards trend, but also because of the dollar’s excess strength that prevents cheap exports.

But what really shows the Fed’s reluctance to decide for a rate increase is its wish for even more improvement of the labour market even though the unemployment rate is currently at 5.1%, the lowest level of the last seven years. Now the only chances of an interest rate increase within this year could be during one of the two remaining FOMC meetings in October and December. and even if that happens, analysts predict that the increases would be small and gradual with the first increase as low as 0.25%.

The Fed’s decision to stick with the same interest rates spurred worries within the markets and a lack of demand for the EUR/USD. The world’s most popular currency pair moved upwards on Thursday by 1%, while on a weekly basis was reduced by a small 0.4% and ended Friday’s trading at 1.12984.

What could also move the EUR/USD is the upcoming ECB President Mario Draghi’s speech on Wednesday 23 September at 13:00 GMT. Mr. Draghi made no secret of the ECB’s readiness to proceed with additional measures to fight low inflation within Eurozone, and that could minimise demand for the euro. Is there a market shocker coming up?

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