By Kathy LienCurrenciesJul 25, 2017 05:55PM ET
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By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
Investors continued to take off short USD/JPY positions ahead of Wednesday’s Federal Reserve announcement and given the positive momentum in the greenback, it may not take much for the gains to spillover to currencies that have resisted the dollar’s rise — like euro, sterling and the Australian dollar. With U.S. stocks climbing to fresh record highs, there’s very little reason for the Fed to change its tune. Taking a look at the table below, even though there have been countless negative surprises in U.S. data, the U.S. economy has still seen more improvement than deterioration since the last FOMC meeting. Yet we can’t ignore the fact that inflation has fallen on a year-over-year basis as spending and wage growth remains weak. So even if the Fed remains committed to normalizing monetary policy, investors will continue to doubt their its until there’s a consistent stream of positive data. Tuesday’s rally in the greenback is supported by a sharp rise in yields, the Senate’s vote to debate Obamacare, stronger-than-expected consumer confidence and an uptick in manufacturing activity in the Richmond region.
Looking ahead to Wednesday’s Federal Reserve announcement, we anticipate 3 changes to the July FOMC statement.
1. No Rate Hike: First the Federal Reserve won’t be raising interest rates like they did in June. They’ve been under the habit of tightening only at quarterly meetings and that seems to be the game plan going forward.
2. Signal Reduction in Asset Purchases “Relatively Soon”: The Fed is in no position to raise interest rates in September but NY Fed President Dudley previously suggested they could shrink the balance sheet in between rate cuts. Reducing asset purchases could begin as early as September, which would make this meeting the perfect opportunity to pre-announce the change.
3. Acknowledge Downtick in Inflation: The biggest problem for the Fed is the decline in annualized consumer and producer price growth. They may be forced to recognize the slowdown in price growth and the impact it has on reaching their 2% inflation target.
USD Data Points
The positives will probably outweigh the negatives, causing the dollar to extend higher post FOMC but the gains won’t last as investors still question the firmness of U.S. data. The next big report will be nonfarm payrolls, so between FOMC and NFP, we could see another round of U.S. dollar weakness, especially as traders step in to fade Congress after the rate decision. Resistance in USD/JPY is at 112.65, the 20-day SMA while support sits at 110.60.
Stronger-than-expected German business confidence helped prevent further losses in euro although the currency still ended the day off its highs against the greenback. Despite the prospect of a rate hike and the consequence of a stronger euro, businesses remain confident that the recovery will strengthen. The resilience of the euro and the central bank’s positive outlook makes the euro a particularly attractive buy on dip post FOMC. Between now and the rate decision, anyone interested in buying euros should look at EUR/JPY. Sterling raced to a high of 1.3084 versus the U.S. dollar before tumbling on the back of U.S. dollar strength. U.K. GDP numbers are scheduled for release Wednesday and while growth is subdued, we anticipate a small uptick due to the rise in retail sales.
One of Tuesday's best-performing currencies was the Australian dollar. Aside from the rise in commodity prices, there was very little catalyst for the move. The most important event risk for AUD this week is consumer prices. Like in many major economies, inflation is low and even if the quarterly rate increases, the year-over-year rate could decline or vice versa. RBA Governor Lowe will also be speaking and chances are with AUD/USD up 10% year to date, he’ll take this opportunity to complain about the strong currency. So if CPI falls short of expectations and Lowe talks down the currency, it would be the perfect catalyst for a top in AUD. The New Zealand dollar, on the other hand, spent most of the day in negative territory versus the U.S. dollar. For the past few weeks, NZD defied fundamentals trading higher despite weaker data, but reports of a deadly cow disease affecting one of the herds finally did in the currency. USD/CAD, on the other hand, weaved above/below 1.25. The sharp rise in Canadian bond yields and 2% increase in oil prices kept the currency pair under pressure throughout the North American trading session. Until data or oil prices reverse course, the uptrend in USD/CAD will remain intact, but the pair is close to a bottom.
FAQs
Interest rates have held steady since July 2023.
The Fed raised the rate 11 times between March 2022 and July 2023 to combat ongoing inflation. After its December 2023 meeting, the Federal Open Market Committee (FOMC) predicted making three quarter-point cuts by the end of 2024 to lower the federal funds rate to 4.6%.
What is the federal discount rate right now? ›
US Discount Rate is at 5.50%, compared to 5.50% the previous market day and 5.00% last year. This is higher than the long term average of 2.12%.
What happens to investments when the Fed raises interest rates? ›
Do interest rate hikes hurt the stock market? If the Federal Reserve raises the short-term federal funds target rate it controls (as it did in 2022 and 2023), it can have a detrimental effect on stocks. A higher interest rate environment can present challenges for the economy, which may slow business activity.
Is the prime rate expected to increase? ›
US Prime Rate Forecast (I:USPR)
US Prime Rate Forecast is at 5.76%, compared to 5.76% last quarter and 5.76% last year. This is lower than the long term average of 5.82%.
What are the predictions for interest rates in 2024? ›
30-year mortgage rates are currently expected to fall to somewhere between 6.1% and 6.4% in 2024. Instead of waiting for rates to drop, homebuyers should consider buying now and refinancing later to avoid increased competition next year.
What is the Fed interest rate projection for 2024? ›
Importantly, the SEP projects that the Federal Funds rate will fall to 4.6% in 2024, 3.9% in 2025, and 3.1% in 2026.
What is the prime interest rate right now? ›
The current Bank of America, N.A. prime rate is 8.50% (rate effective as of July 27, 2023).
Why were interest rates so high in the 80s? ›
As we headed into the 80s, it's important to note that the country was in the middle of a recession, largely caused by the oil crises of 1973 and 1979. The second oil shock caused skyrocketing inflation. The cost of goods and services rose, so fittingly, mortgage rates did too.
What is the prime mortgage rate today? ›
US Bank Prime Loan Rate is at 8.50%, compared to 8.50% the previous market day and 8.00% last year. This is higher than the long term average of 6.83%.
What stocks do well when interest rates rise? ›
Financials First. The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
What stocks do well when interest rates fall? ›
Cyclical stock sectors
The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.
Will CD rates go up in 2024? ›
"CD rates will most likely drop and drop substantially in 2024," says Robert Johnson, professor of finance at Heider College of Business at Creighton University. "The biggest reason is the likelihood of Federal Reserve rate cuts later this year."
Will mortgage rates ever be 3% again? ›
After all, higher rates equate to higher minimum payments. So, you may be wondering if, and when, mortgage rates might fall to 3% or lower again - and whether or not it's worth waiting to buy a home until they do. Although rates could fall to 3% again one day, it's not likely to happen any time soon.
What are interest rate predictions for the next 5 years? ›
ING's interest rate predictions indicate 2024 rates starting at 4%, with subsequent cuts to 3.75% in the second quarter. Then, 3.5% in the third, and 3.25% in the final quarter of 2024. In 2025, ING predicts a further decline to 3%.
What will interest rates be in 2025? ›
The average 30-year fixed mortgage rate as of Thursday was 6.99%. By the final quarter of 2025, Fannie Mae expects that to slide to 6.0%.
Will interest continue to rise in 2024? ›
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down.
Will interest rates go down in 2024 for cars? ›
Lower Auto Loan Rates Could Make 2024 a Good Time To Buy or Refinance. While market predictions are bullish on the funds rate — and by extension, auto loan rates — finally coming back down in 2024, it's still not a guarantee. Powell and others at the Fed remain committed to their target of 2% inflation.
Will inflation go down in 2024? ›
For now, it looks like inflation will return to normal without a recession. As we had expected, inflation fell sharply in 2023 after reaching its highest level in over 40 years in 2022. In 2024, we project inflation to return to normal levels, in line with the Federal Reserve's 2% target.
