Interest Rate Hike Causes Loss of Value for the US Dollar
The mover and shaker this week was the Fed announcement around interest rates. The Fed increased short-term rates by 25 basis points, as expected, and virtually none of the markets liked the news. Though the rate hike was expected there was still hope that they would leave the rate untouched until later next year but of course, that was just wishing for a Christmas miracle. When interest rates increase it is typically good for that country’s currency but the USD fell flat this week on the news staying flat or slightly losing to most major currencies. Though the data supports US economic growth, which was the reason for the rate increase, the US stock market has been beaten down this month so in that respect, the rate increase had unfortunate timing. There have only been a few times in US history when there was a rate hike while the stock market was falling so quickly so though this is not unprecedented it is highly unusual. There has been a tremendous loss in value over the past few weeks and the rate hike, so far, has added to that loss.
Though a lot of the Forex pairs began the trading week in much same way they ended the previous week, range bound for the most part, some pairs did show signs of early life. Most of the major currencies made strong early moves against the CAD, which may have had allot to do with the price oil, and those currencies continued to pummel the CAD all week. It turns out that the USD, EUR, JPY, and GBP all made very convincing moves against the CAD and right now it appears as though those moves may continue.
The JPY made an early move against the USD but that pair had been trading within a 175 pip range for about 2 months so it was hard to say if a sustained move was even possible at that point. It turns it was with the JPY advancing about 250 pips on USD for the week. The USD was about even and still range bound against EUR and GBP but it gained significantly against the AUD. The AUD/USD has been rolling nicely up and down all year and this week’s move extended a very convincing downward move that started at the beginning of December.
The GBP is likely to continue to have its challenges as the Brexit struggle continues. The Prime Minister has little support at home for the Brexit deal that she wants to negotiate and the EU countries insist that they have given all of the concessions that they will give so they may be at an impasse. The end of the first quarter deadline is quickly approaching so something needs to happen one way or the other. GBP was crushed by JPY this week but it remained relatively flat against the USD and the EUR. The GBP/USD traded above $1.40 earlier this year and has retreated to around $1.26 losing about 1,400 pips so far in 2018.
The EUR, which is on the other side of the Brexit deal, hasn’t exactly been a stellar performer but as mentioned previously it did advance against the CAD, it also moved against the AUD but the JPY gained a good amount against it.
The next few weeks may be relatively quiet due to the Holiday Season so be aware of lower liquidity which can lead to slower fills and larger spreads. The Forex market may be dramatically slower next week but be prepared to take anything that it is willing to give.
About Bill Poulos:
Bill Poulos is a retired General Motor Executive. He began learning and trading in the stock market as a hobby while raising his three boys with his wife, Karen. In 2001, Bill and his son, Gregory Poulos, founded Profits Run, Inc. with the goal of educating individuals on making simpler trades while minimizing risk. The company offers publications, investing software, and coaching for their members. Bill earned an MBA with a major in finance from the University of Michigan. He believes in celebrating members of the community who are making a difference through the Profits Run Starfish Award. The Poulos family lives in Wixom, Michigan.