May 23, 2018

Stocks march on as Fed rate hike looms, dollar steady

18 June 2017, 12:43 | Cesar Cruz

Local currency went up 11 paise or 0.17 percent against dollar to settle at 64.43.

The year-on-year gain in the CPI in May was still larger than the 1.6 percent average annual increase over the past 10 years.

Friday will also see the publication of the Eurozone's Q1 wage growth stats, as well as trade balance data for April from Italy and Ireland.

Meanwhile, USD/CAD advanced 0.32% to trade at 1.3287, pulling further away from the previous session's more than three-month low of 1.3163. Year-on-year, retail sales increased by 0.9% last month, compared to forecasts for a 1.7% rise.

The local currency on Thursday closed 23 paise down to a two-week low of 64.53 per dollar after the US Federal Reserve hiked interest rates and maintained a hawkish tone going forward.

The US central bank's decision to revise a long-standing "policy normalization" plan came as somewhat of a surprise given a series of weak inflation readings risked delaying its march toward tighter policy.

The U.S. yield curve flattened, with the difference between short-dated two-year Treasury yields and benchmark 10-year yields narrowing to a difference of 78.58 basis points US2US10=RR, the smallest since September 9."It just looks like the Fed is sticking to their story and the market remains highly skeptical that the Fed is going to be able to deliver just based upon underlying data". Bond prices and yields move in opposite directions. The Fed's signals for the rest of 2017 will be vital for US Dollar exchange rate movement going forward. Month-on-month inflation was projected to remain at 0.1% but instead dropped to 0%.

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"It's like a game of chicken between investors and the Federal Reserve", he says. He notes the Fed has given no indication it will slow the pace of rate hikes it has laid out.

Analysts and investors are still unsure if the Fed will manage a third 2017 United States interest rate hike.

Risk sentiment was also hit by fear of more United States political turmoil after Washington Post reported that Trump is being investigated by special counsel Robert Mueller for possible obstruction of justice.

"Although the hawkish surprise offered a temporary boost to the dollar, markets have not bought into this newfound optimism as expectations of another interest rate increase in 2017 now stand below 50%". The Fed also indicated that its interest rate outlook had not worsened despite this week's inflation data.

Thursday will see the publication of May's inflation stats from France and Italy, with final May inflation results for the overall Eurozone being published on Friday.

The Australian dollar is little changed at.7578 per dollar after Australia's jobs report crushed expectations.

Looking ahead, the Euro will likely strengthen on Monday if French President Macron's 'en Marche!' party secures a big win in Sunday's French legislative elections.

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