Fed Hikes Rates: EUR/USD Positioning

Posted March 18, 2017

The Federal Reserve may be well set on its interest-rate raising course this year, but gains in the dollar could prove harder to come by.

The pan-European STOXX 600 index rose 0.7 percent and touched its highest level since December 2015, helped by the Fed's dovish tone and the Dutch election results.

With an immediate US rate increase seen as a done deal, investors are focusing on what message the central bank will deliver when it concludes a two-day meeting on Wednesday. European stocks have recent risen in part on the prospect that the US economy has strengthened enough to take on another rate hike, but the move would still raise the cost of borrowing for companies.

A key index of world stocks climbed to record highs while the U.S. dollar sank to a month low yesterday as investors digested the recent USA interest rate increase and indications there would be no pick-up in the pace of monetary tightening.

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MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.3 per cent and were on track to end the week with a 3.5 per cent gain, its biggest increase since the week ended July 15.

"How much further support the euro can garner would depend on how the Dutch vote could now impact the French presidential elections, for example by eroding support for (Marine) Le Pen". Minutes from the Bank's latest Monetary Policy Committee meeting shocked markets on Thursday by showing one outgoing official voting for a rise in rates, and others on the verge of doing so if inflation gets much higher.

The dollar fell 0.2 percent against a basket of key currencies, adding to Wednesday's steep slide after the Fed's decision. Its strongest since March 1, 0.2 percent higher on the day.

In commodities, oil prices rose slightly, supported by a weaker dollar. The 0.6 percent gain beat expectations for a 0.2 percent decline, while sales volumes were also solid, rising 0.7 percent. Comments from several Fed officials and USA economic data in the last few weeks have been supportive of a rate hike.

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Junior companies in the Gold sector will more than likely start seeing some major traction in the near future, especially considering that Fed officials signalled only two more rate hikes this year, below what most economist had been predicting, which sent USA government bond yields lower and hurt the dollar. The kiwi had risen to a 12-day peak of $0.7050 the previous day.

The 10-year yield was at 2.5313 per cent from its last close of 2.524.

Brent crude settled up 2 cents to $51.76 a barrel while USA light crude ended up 3 cents to $48.78 a barrel. Benchmark Brent settled up 1.8 percent to $51.81 a barrel. Gold prices have fallen more than 5 percent since the precious metal failed to sustain a break above its 200-day moving average at around $1,261 in late February.

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