This month, the EUR/USD was marked by an appreciating trend.
After a slight downtrend in the first couple of days the EUR sharply rose to 1.0623 on the 3rd day after Yellen announced a likely rate hike. On the 9th, in the ECB press conference, despite the interest rates remaining unchanged, Draghi’s speech was optimistic about the improvement of the economy saying that “there is no longer that sense of urgency in taking further actions”, which sent the EUR in an uptrend that lasted until the 13th reaching 1.0714. On the same day, the UK parliament passed the final Brexit bill, thus allowing the government to trigger Article 50 when ready, which sent the EUR value down to as low as 1.0600 on the 14th. On the 15th, in the same day that the Fed announced a raise in its benchmark lending rate, the EUR rose closing the day at 1.0723. Throughout the next days, the EUR continued to appreciate peaking at 1.0905 on the 27th. Moreover, Germany’s two representatives in the ECB governing council said it was time for a change in the ECB’s policy. Those rumors sent the EUR in a downtrend. On the 28th CB Consumer Confidence was released, and signaled a sharp increase that lifted the USD closing the month at 1.0656
On March, the EUR/USD was marked by a bullish movement with a downward movement in the final days of the month.
On the first two days, it is observable a depreciation of the Euro with the pair reaching, on the 2nd of March, the lowest value of the month at 1.04944. Between the 6th until 8th of March, a downturn of the pair happened, but without breaking the support line at 1.04944. On the 9th of March, an upward movement initiates, at the same time MACD starts to rise above the signal line, confirming the bullish movement until the 27th. On the first day of this movement, the SMA 50 started to rise closing the gap to the SMA 100. In the 20th March, the cross between the two moving averages confirmes the presence of the upward movement as previously indicated by the MACD. On the 15th of March, it breaks the resistance of 1.07310 formed five days earlier. On the 27th March, it was record the highest price of the month reaching 1.08618. At the end of the month, the MACD, fell below the signal line, starting a bearish trend, with the price reaching 1.06536 on the last day of the month.
FED’s interest rate hike
On the 15th of March the FOMC decided to raise the federal funds rate for the 3rd time since the financial crisis, adjusting its target goal from 0.5%- 0,75% to 0,75%-1%. Some of the factors that contributed to this decision were: a continuous moderate economic recovery; the labor market continued its upwards dynamic, the increasing total employment in % of the total population and decreasing unemployment rate; private consumption has increased above expectations and investment has stabilized, and inflation got closer to FED’s 2% long-run objective.
“The basis for today’s decision is simply our assessment of the progress of the economy and it’s been doing nicely”, Yellen said at the post-meeting news conference. The FED is close to achieving its goals. The unemployment rate fell to 4.7% in February, and after several years of concern that prices were not rising fast enough, inflation is reviving, with a rose to 1.9% over the 12 months ending in January, close to its 2% annual target. More broadly, officials left expectations for economic growth a little changed. The forecast for GDP gains in 2017 remains 2.1%, while 2018 was pushed up one-tenth to 2.1%. Longer-run growth estimates remained at 1.8%. On the same day, more data was released, with the Consumer Price Index rising 0.1% in February, and separately, Retail Sales rising also 0.1% in February, all good signals from the US’s economy. (Source: The Telegraph)
Yellen and other FED leaders reaffirmed their commitment to raising rates faster this year, two more times in 2017, though it all depends on how the economy performs. Some market participants had feared that the statement and accompanying economic projections would point to a more hawkish Fed, with a faster pace of rate hikes ahead. However, the closely watched "dot plot" that shows each member's expectations for where rates will be in coming years changed little from the last meeting. The market currently expects two more hikes this year, which was in line with the bank's projections from December 2016. The market expects the next hike to come in June and another in December. (Source: CNBC)
The markets reacted to the FED’s decision of hiking the funds rate with the US 10-year bond yield falling 3,772% and the US 5-year bond yield also falling 5,689% on that day. On the other hand, the Standard & Poor's 500 index rose 0,708%, the Nasdaq Composite Index varied 0,646% and the Dow Jones Industrial Average had an identical behaviour rising 0,361%. In the currency market, the dollar slid against the euro on Yellen’s dovish statements, with the pair EUR/USD rising 1,254% and the US dollar Index falling 0,975% on that day.
This was a decision that, although expected, did not generate consensus, and divides the opinions of the most specialists. The first question raised is whether it has been a very quick rise in such a short space of time since the first hike came at the end of 2015 and the second almost exactly one year later. Narayana Kocherlakota, an economist at the University of Rochester and a former member of the Fed’s policy-making committee, said that “We should be seeing faster wage growth with this level of employment growth if we were close to full employment” which suggests, that the economy has not yet returned to full employment, reinforcing the need for this hike. On the other hand, Deron McCoy, the chief investment officer at SEIA, a Los Angeles firm affirmed that “The first four to eight rate hikes are the low-hanging fruit (…) the real test will be whether the economy can withstand positive real rates. And that still seems to be a 2019 topic.” enquiring the preparation of the US economy for the upcoming implications of this decision. (Source: New York Times).
The future of the FED's monetary policy is another top-of-the-table topic that also does not generate a unique view among economists and experts in the field. Anna Stupnytska, global economist at Fidelity International defended: “Our base case is only one more hike this year. This is because we are likely reaching a cyclical peak soon, and the likelihood of a China slowdown weighing on global inflation, markets and growth are fairly high”. Nevertheless, Kully Samra, UK Managing Director of Charles Schwab, said: “Today’s decision is a defining moment in US monetary policy heralding the end of the “lower for longer” era. We expect the Fed to continue on this rate-raising path for the foreseeable future and Janet Yellen’s intention to increase rates three times this year demonstrates a bullish confidence in the strength of the US economy. (…) We expect three rate hikes this year, including today’s, and a further two in 2018” supporting the need to pursuit this monetary policy. (Source: The Telegraph)
Last but not least, another important question that this decision motivates it is what will be the real impact on the economy. Lawrence Yun, chief economist at the National Association of Realtors said: “Over the long-term things move in the same direction — we’re in a rising interest rate environment, which will begin to nudge up the 30-year fixed rate mortgage.” pointing to the real estate loan market. Michael Fratantoni, chief economist at the Mortgage Bankers Association, adds: “If you’re looking to buy, there’s an argument to do so sooner rather later. Wait another year and rates are likely to be higher. It’s not going to get less expensive by waiting.” (Source: Financial Times)
“The simple message is the economy is doing well. We have confidence in the robustness of the economy and its resilience to shocks,” Yellen said. As the FED continues to monitor current and expected inflation, stability returns to US’s economy, with FED slowly shifting its major objective from stimulating economic growth to maintain said stability, whether it be on prices or job creation. FED’s main problem is now to achieve a delicate balance, as it cannot over-tighten economic growth – poised to increase due to Trump’s policies – nor can it “fall behind the curve”, due to fears of international instability regarding protectionism and the rise of populism across the globe. (Source: CNBC)
Did you know...
... that ECB and FOMC implement monetary policy decisions 8 times a year?
The Governing Council, main decision-maker of ECB, not only meets every two weeks but also takes its monetary policy, namely setting its key interest rate, every six weeks (approximately 8 times a year). The reminiscent meetings regard issues related to other responsibilities of the Central Bank, i.e. payment systems, financial stability, statistics, banknotes and banking supervision. (Source: ECB)
The FOMC is responsible for the open market operations and assembles exactly 8 times a year in scheduled dates, and others as necessary. The conference details of each of the 8 meetings are only available after three weeks of its occurrence. (Source: FED)