By Lukman Otunuga, Research Analyst at FXTM
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Confidence in the global economy received an uplift Wednesday night following the Federal Reserve’s unanimous decision to finally raise US interest rates for the first time in almost a decade. The Dollar was installed with some bullish momentum across the currency markets, however it was repeated on several occasions as expected that future rate rises will be gradual.
With the era of near-zero rates coming to an end in the US, the focus will now be directed around the pace and intensity of future interest rate rises. The Fed dot plot suggests that interest rates will conclude 2016 around 1.50% which would suggest another four rate rises next year, although this would be a bit ambitious considering that Janet Yellen is clear in repeating her message that all rate rises will be “very gradual”.
Sentiment towards the Dollar received a slight jab during the FOMC press conference when US Fed chief Yellen suggested that rates had to be increased to prevent abrupt and rushed rate rises later which could heighten the risks of the US economy entering a recession. While employment has recovered considerably, the static rate of inflation growth is going to prevent the Fed from raising interest rates as often as the dot plot currently suggests. US inflation growth is going to be an obstacle for the Fed and has the ability to sabotage the expected pace of further rate rises, which is something the markets should be monitor for possible USD weakness in the future.
It has to be said that the Federal Reserve succeeded in creating a controlled market reaction towards the historical US rate rise during trading on Wednesday, despite the high speculation circulating that market volatility could intensify out of control. It must be understood that the Fed repeated on several occasions that there was a high likelihood that rates would be increased within the year. The repeated confidence which investors received that this would occur in December from around late October meant that the decision was already heavily priced into the markets.
US equities positively digested the interest rate rise and investors reacted positively to the indications that there is confidence the economy is resilient enough to withstand gradual increases in borrowing costs at a slower pace. The positivity felt across American equities should have a positive impact on Asian markets and install a positive reaction at the beginning of European trading, while the Dollar may continue to approach its heavy psychological resistance at 100.
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