US Dollar Rallies Ahead of Fed Interest Rate Decision

United States Federal Reserve (FED)

Weekly Update

The FOMC is widely expected to maintain the benchmark Federal Funds rate target between 0.00% and 0.25% in Tuesday’s monetary policy meeting . As usual, market participants will be examining the policy statement to get an idea of the Fed’s outlook for growth, inflation, and interest rates going forward. Since the last meeting, economic data out of the U.S. has notably weakened, with the labor market of particular concern. Risk appetite will likely get a boost if the Fed hints at additional monetary stimulus to support the economy. Otherwise, financial markets may be disappointed by lack of action from the central bank.

European Central Bank (ECB)

Weekly Update

ECB government bond purchases have almost ceased completely. In the prior week, a mere 9 million euros of bonds were bought by the central bank. Purchases in the thirteen weeks of the program have totaled nearly 60.5 billion euros. The yield on the Spanish 10 Year Government Bond has tumbled in recent weeks, suggesting that the program has been a success. From a high of 4.88% in mid-June, the Spanish yield now stands near 4.03%.

Bank of England (BOE)

Weekly Update

Market participants await the quarterly Inflation Report from the Bank of England on Wednesday. The central bank’s inflation outlook will be a critical factor in its interest rate decision making process.

Bank of Canada (BOC)

Weekly Update

BOC interest rate expectations have fallen sharply as growing evidence of a slowdown in the United States has emerged. The U.S. is Canada’s largest trading partner by far (73% of total exports go to the U.S.) and as exports account for 30% of Canada’s GDP, the impact will be felt. Markets expect 62 basis points of rate hikes over the next twelve months, down from 106 basis points in late-July.

Bank of Japan (BOJ)

Weekly Update

The BOJ held the benchmark overnight rate at 0.1% as expected. The central bank kept its economic assessment unchanged and said that the Japanese economy has been showing further signs of a moderate recovery. The BOJ acknowledged that global financial developments are a downside risk and that beating deflation continues to be a critical challenge.

Reserve Bank of New Zealand (RBNZ)

Weekly Update

RBNZ interest rate expectations have tumbled since the dovish policy statement of two weeks ago. Recall that the central bank remarked that economic conditions had deteriorated and that “The pace and extent of further OCR increases is likely to be more moderate than was projected in the June Statement.” The RBNZ also tried to talk down the country’s currency, stating that ““The New Zealand dollar has appreciated in recent weeks. This appreciation is inconsistent with the softening in New Zealand’s economic outlook and moderation in our export commodity prices.” Markets expect that the RBNZ will hike rates by 72 basis points over the next twelve months, down from the 134 basis points that were expected prior to the dovish statement. Moreover, while markets expect the central bank to hike rates in its next meeting in September, conviction is low.

Reserve Bank of Australia (RBA)

Weekly Update

The RBA kept the cash rate target at 4.5% last week, describing the current monetary policy setting as “appropriate” considering “interest rates to borrowers [are] around their average levels of the past decade [while] growth is likely to be close to trend [and] inflation close to target.” RBA interest rate expectations remain depressed following a benign CPI reading on July 28th. Recall that Australian CPI rose 0.6% in the second quarter, well below expectations for a 1.0% increase.

Swiss National Bank (SNB)

Weekly Update

The EUR/CHF exchange rate continues to rebound off recent all-time lows. At 1.385, the pair is comfortably above those 1.3072 lows, which is undoubtedly encouraging to the Swiss National Bank. All else equal, a rising EUR/CHF exchange rate is positive for SNB rate hike expectations, as a weaker Swiss currency has a stimulative impact on the economy.

For a summary of past rate decisions, see our Central Bank Interest Rate Outlook