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Another Fed rate hike is expected

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According to the results of the last week the US stock indices remained almost unchanged, while the dollar index dropped. On Monday, positive economic data on the growth of industrial orders, as well as durable goods orders for January were released. However, investors neglected them concentrating on political news. Donald Trump accused Barak Obama’s administration of wiretapping the telephone conversations of his office during the last presidential elections in the US. This pushed the US stock prices down. An additional negative for the market became the new missile tests in North Korea. Meanwhile, the US dollar, on the contrary, strengthened mainly against the euro due to the newly increased political risks of the French presidential elections. The former prime minister of France Alain Juppé refused to run in the presidential elections. Market participants believe that this slightly increased Marine Le Pen’s chances of victory in the presidential race. Let us recall that she favors France’s exit from the EU.

On Tuesday and Wednesday, the trend persisted: the dollar was strengthening, while the US stock indices were dropping. No significant economic data came out. It may be noted, that on Tuesday, pharmaceutical stocks led the decliners after Donald Trump’s announcement. He said that he was working on “a new system” which would allow to decrease the prices of drugs, but did not mention any details. On Wednesday, the ADP independent agency published positive US labor market data. This contributed to the further increase of the dollar index. The likelihood of the Fed rate hike at the next meeting on March 15, 2017, reached 90%. On the background of the decreasing oil prices, the decline in stock prices of the US energy sector exceeded 2%. This pushed the Dow and the S&P500 stock indices down.

On Thursday, the ECB regular meeting took place and the rates remained unchanged. The head of the ECB Mario Draghi announced that he would make all efforts to stimulate the economic growth in the EU and control the inflation. This contributed to the significant strengthening of the euro, while the dollar index dropped. The US stocks fell as well, because investors made profits before the publication of important statistics.

On Friday, very important official data on the labor market for February came out in the US. Non-farm Payrolls showed an impressive growth and markedly exceeded the forecasts. The US stock indices continued rising due to this. The likelihood of the Fed rate hike reached 93%. Nevertheless, the dollar index considerably dropped. Some economic editions have reported that the ECB is considering the probability of the rate hike without waiting for the end of the asset buyback program. This contributed to the significant strengthening of the euro by more than 1% and weakening of the US dollar.

The main event of this week will be the next Fed meeting on Wednesday, March 15, 2017. The Fed funds target rate is expected to increase from 0.625% to 0.875% or by 0.25%. Besides, on Wednesday, the data on inflation and retail sales will be released, and the Fed Chair Janet Yellen will speak as well. On Thursday, the US real estate market data and on Friday, the Michigan University Consumer confidence index and Manufacturing index will be published.

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