Forex Today: Fed rate decision and revised dot plot to ramp up volatility
Here is what you need to know on Wednesday, June 17:
Markets cling to a cautious stance in the European morning on Wednesday as investors gear up for the Federal Reserve's (Fed) monetary policy announcements. The Eurostat will publish revisions to the May Harmonized Index of Consumer Prices (HICP) inflation data and the US economic calendar will feature Retail Sales figures.
Following Monday's risk rally, Wall Street's main indexes traded mixed on Tuesday as the details surrounding the framework agreement between the United States (US) and Iran remained vague. In the late American session, Iran's foreign minister said that the next round of negotiations will start on the same day that sides sign the Memorandum of Understanding (MoU) and added that talks will continue for 60 days to reach a final agreement, which will include nuclear issues and lifting of the sanctions.
US Dollar Price This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Swiss Franc.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.31% | -0.08% | 0.10% | 0.05% | -0.23% | 0.14% | -0.62% | |
| EUR | 0.31% | 0.20% | 0.41% | 0.36% | 0.06% | 0.44% | -0.31% | |
| GBP | 0.08% | -0.20% | 0.02% | 0.16% | -0.15% | 0.25% | -0.51% | |
| JPY | -0.10% | -0.41% | -0.02% | -0.06% | -0.33% | 0.08% | -0.71% | |
| CAD | -0.05% | -0.36% | -0.16% | 0.06% | -0.30% | 0.14% | -0.66% | |
| AUD | 0.23% | -0.06% | 0.15% | 0.33% | 0.30% | 0.39% | -0.37% | |
| NZD | -0.14% | -0.44% | -0.25% | -0.08% | -0.14% | -0.39% | -0.75% | |
| CHF | 0.62% | 0.31% | 0.51% | 0.71% | 0.66% | 0.37% | 0.75% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
In the meantime, Iran's Top Joint Military Command, Khatam al-Anbiya Central Headquarters, responded to Israel's latest attack in southern Lebanon, warning that Israel should expect a hard response if it did not stop its attacks.
In a joint statement published early Wednesday, the leaders of the G7 countries said that they will strengthen sanctions against Russia, including those on the oil and gas sectors, and added that they will make efforts to diversify energy supply routes and reduce dependence on the Strait of Hormuz and increase energy stocks.
After posting marginal losses on Tuesday, the US Dollar (USD) Index holds steady at around 99.50 on Wednesday. Markets widely expect the Fed to leave its monetary policy settings unchanged. The revised Summary of Economic Projections (SEP) and Fed Chair Kevin Warsh's comments in his first post-meeting press conference could provide key clues regarding the interest rate outlook and ramp up market volatility.
The UK's Office for National Statistics (ONS) reported on Wednesday that annual inflation, as measured by the change in the Consumer Price Index, remained unchanged at 2.8% in May. On a monthly basis, the CPI rose 0.2% following the 0.7% increase recorded in April and below the market expectation of 0.4%. Other details of the report showed that the Retail Price Index rose 3.1% on a yearly basis, compared to 3% in April, and the Producer Price Index - Input was up 8.7% in this period. After rising quickly with the immediate reaction to inflation data, GBP/USD lost its traction and it was last seen trading virtually unchanged on the day at around 1.3420.
Gold (XAU/USD) held its ground following Monday's upsurge and registered small gains on Tuesday. In the European morning on Wednesday, XAU/USD stays in a consolidation phase above $4,300.
EUR/USD moves sideways slightly above 1.1600 after posting small gains for two consecutive days.
The Japanese Yen failed to benefit from the Bank of Japan's decision to raise the policy rate by 25 basis points on Tuesday and ended the day marginally lower against the USD. USD/JPY fluctuates in a narrow range above 160.00 in the European morning on Wednesday.
AUD/USD struggles to gain traction and trades at around 0.7050 following Tuesday's choppy action.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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