Greenback Falls After Hawkish Fed Minutes

Source: Forex News

The USD declined sharply in
overnight trading after the Federal Reserve released the minutes for the
December meeting. In the meeting, the Fed raised interest rates by 25 basis
points. This was the fourth rate hike in the year.

The hike came at a time when the
economy was going through major challenges. After rising by 4.2% in the second
quarter, the economy slowed to 3.5% in the third quarter. At the same time,
cracks in corporate America started to emerge after companies started lowering
their expectations. The biggest casualty was Apple, which was then the biggest
company in the world. In its earnings release, the company announced that it
was ending the release of unit sales. In total, more than 60% companies in the
S&P lowered their guidance.

Clouding the space was the
never-ending trade conflict between the United States and China. The two
countries have been engaging in a trade conflict for months. This has started
affecting the US economy and the expectations are that the economy will slow
down if it remains. All these issues led to a sharp increase in the volatility.

With all this in mind, investors
expected the Fed to leave interest rates unchanged. The US president was increasing
his pressure on the Fed. And so did other influential people in the American
economy like Doubleline’s Jeff Gundlach. All these factors likely contributed
to the rate hike as the Fed tried to show its independence.

In the meeting, the bank issued a
forward guidance that showed two more hikes this year. This led to a sharp rise
in the USD as investors started fearing high interest rates.

Yesterday’s minutes showed that
the bank’s officials were open to leave rates unchanged. In the minutes, they
said that since the country is going through a low inflation phase, they were
prepared to wait and see. They will also remain steadfast in watching the
developments in the economy and make changes when necessary. In the statement,
they said:

After assessing current conditions and the outlook for economic
activity, the labor market, and inflation, members decided to raise the target
range for the federal funds rate to 2¼ to 2½ percent. Members agreed that the
timing and size of future adjustments to the target range for the federal funds
rate would depend on their assessment of realized and expected economic
conditions relative to the Committee’s maximum employment and symmetric 2
percent inflation objectives.

This year, the bank’s officials
have tried to build confidence in the market by saying that they remain
flexible when making interest rates decision. At an event last week, the Fed
chair said that the officials will likely remain flexible based on the data.
The same statement has been repeated by other Fed officials. In response to the
minutes yesterday, the USD index declined as shown below.

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