USD Update – Forex Trading Tips

The US is still on track to be the first country out of the major currencies to increase interest rates. Therefore, the US dollar remains a bullish currency in the medium term. However we may see a period of consolidation in the USD until we get our next set of inflation data. We will be monitoring CPI and PCE data closely to decide when the Fed are likely to raise rates.

USD Update

Interest Rate

Fed Funds Target Rate: 0.25%

Last Change: December 16, 2008 (0.50%)

Expected Future Change: 11% probability of a rate increase at the next meeting

Next Release: October 28

Inflation

Inflation Target: 2%

Period: Year ending August 31

CPI: 0.2%

Core CPI: 1.8%

Next Release: October 15

Employment

Month: August

Non-Farm Employment Change: 173,000 Expected: 215,000

Unemployment Rate: 5.1% Expected: 5.2%

Average Hourly Earnings: 0.3% Expected: 0.2%

Next Release: October 2

Growth

Period: Q2 (annualised)

Preliminary GDP: 3.7% Expected: 3.2%

Next Release (Q2 Final GDP): September 25

Analysis

The Fed kept the Federal Funds Rate on hold at the September 17 meeting. This was a highly anticipated release given it was the first real possibility of a Fed rate hike since 2006. The market was pricing a 30% probability of liftoff. The accompanying statement was relatively dovish with the Fed citing low inflation as the main cause of delaying liftoff; “Market-based measures of inflation compensation moved lower,” and “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” With Core PCE having ticked down to 1.2% for July – the lowest level since 2011 – the Fed will likely need to see a move higher in inflation before being confidence that it is moving back towards the 2% target.

The press conference also mentioned the recent financial market volatility and the slowdown in China reasons against raising rates at that meeting. The economic projections showed expectations of a lower rates than previously expected for 2016. Yellen did not rule out a rate increase at the October meeting however the market is pricing a December liftoff with higher probability; CME Group Fed Fund futures see 11% chance of October liftoff versus 39% of December. The USD sold off across the board after the rate decision and during the ensuing press conference. However USD losses were capped and the currency began to regain strength 24 hours post decision. By the close of trade on Friday, September 18, major pairs were back at pre-announced levels as the market still anticipates a rate hike soon. It is likely there will be sideways trading in USD pairs until we get some fresh news.

The employment situation in the US has been excellent and has provided the Fed with a strong argument to raise rates. Over 200,000 jobs have been added every month this year aside from March and August. The most recent release, although slightly missing on the headline change, saw the unemployment rate tick down to 5.1% – the lowest levels since pre-GFC – and average earnings hourly increase to 0.3%.

Regarding inflation, Core CPI rose 1.8% during the 12 months ending August 31, below estimates of 1.9%. Comparatively, CPI including Food and Energy has risen only 0.2% for the same period – showing the massive impact of oil prices. To reach their objective of 2% inflation the Fed need to be confident that Core inflation is trending towards that level before raising rates. Core Personal Consumption Expenditure Price Index for the 12 months ending July 31 saw price increases drop to 1.2% from 1.3%. This marks the lowest level in PCE inflation since March 2011, and hence restrains liftoff. PCE for August is due out on September 28; a move down to 1.1% will greatly diminishes chances of a rate hike this year, while a unchanged reading will also likely to keep the Fed on hold. Core PCE is key data that will inform the Fed’s decision at the upcoming October and December meetings.

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