Fed's Hawkish Guidance Lifts Dollar

(RTTNews) - A drastic reduction in Fed rate cut hopes in the aftermath of the hawkish forward guidance by Chair Jerome Powell boosted the U.S. Dollar during the week ended October 31. The U.S. dollar inter alia rallied against the euro, the British pound, the Japanese yen, the Swiss franc, the Swedish krona, and the Canadian dollar but declined against the Australian dollar.

The Federal Open Markets Committee, in a widely expected move lowered on Wednesday, the target range for the federal funds rate by quarter percentage point to 3.75 to 4.00 percent. The Committee reiterated its strong commitment to support maximum employment and returning inflation to its 2 percent objective. The Committee also decided to conclude the reduction of its aggregate securities holdings on December 1.

However, a cautious tone by the Fed Chair in the press briefing that followed the rate cut announcement changed market sentiment. Markets had strongly expected another rate cut in the next review in December, but the Fed Chair's comments ruled out any such guarantee.

As markets factored in the hawkish guidance, rate cut expectations also ebbed. According to the CME FedWatch tool that tracks the expectations of interest rate traders, the likelihood of the Fed slashing rates to 3.50-3.75 percent in December dropped to 63 percent by Friday, October 31. It was at 94.4 percent on Monday, October 27.

Fading rate cut hopes bolstered the greenback. The Dollar Index, a measure of the U.S. dollar's strength against a basket of 6 currencies gained 0.86 percent during the week ended October 31. The index closed at 99.80, versus 98.95 a week earlier. Though the Index had dropped to a low of 98.57 on Tuesday, after the FOMC, it rose to a high of 99.84 on Friday.

Amidst the dollar's rebound and the widely expected status quo on rates by the European Central Bank, the EUR/USD pair declined 0.77 percent, closing at 1.1536 versus 1.1626 a week earlier. During the week, the pair ranged between the high of 1.1669 recorded on Tuesday and the low of 1.1521 touched on Friday. Data released during the week had shown higher-than-expected quarterly GDP and inline annual consumer price inflation.

The GBP/USD pair slipped 1.2 percent during the week ended October 31 amidst concerns about economic growth that renewed rate cut expectations from Bank of England. The sterling declined to $1.3155, from $1.3313 a week earlier after touching a high of $1.3371 on Tuesday and a low of $1.3096 on Friday.

The Australian Dollar however rallied 0.49 percent against the U.S. Dollar during the week ended October 31. The pair ranged between the low of 0.6525 recorded on Monday and the high of 0.6619 recorded on Wednesday but eventually closed at 0.6546. The pair was at 0.6514 a week earlier. The Aussie's moves came amidst data revealing higher-than-expected levels of consumer price and producer price inflation. The yen weakened and the USD/JPY pair rallied 0.75 percent during the past week ended October 31 after Bank of Japan left rates unchanged and gave forward guidance that was less hawkish than what markets had anticipated. The pair jumped to 154.01, from 152.87 a week earlier. The week's trading ranged between the low of 151.54 recorded on Wednesday and the high of 154.46 recorded on Thursday.

At the onset of the current week the Dollar Index has edged up to 99.89 amidst uncertainty about the pending economic data releases and its influence of the Fed's potential interest rate trajectory.

The EUR/USD pair has decreased to 1.1517 whereas the GBP/USD pair has declined to 1.3131. Ahead of Reserve Bank of Australia's interest rate decision, the AUD/USD pair is trading at 0.6550, just above the flatline. The USD/JPY pair has edged up to 154.14.