Is a Federal Rate Hike Still in the Mix?
Only a few weeks ago, most analysts were nearly certain that the United States Federal Reserve was poised for what was said to be a much-anticipated rate hike. As we are fast approaching the end of September, it appears as if this move will not come to pass. Why is the the case, what effect will it have upon the value of the dollar and how can online Forex traders who utilise platforms such as CMC Markets benefit from any type of reversal? Let us address each question in a bit more detail.
Why Have We Not Seen a Hike?
The main reason that we may not witness a rate hike for the remainder of the 2016 fiscal year is the fact that the sale of durable goods (examples include cars, household appliances and computers) out of the United States has fallen sharply. A contraction of 1.5 per cent is seen as being quite dismal in terms of aggregate output. Durable goods are also a signal of consumer liquidity, so even a slight negative movement could indicate a more stagnant domestic economy just over the horizon.
Such figures have caused the United States Federal Reserve to take a step back from what would have been otherwise deemed a relatively certain rate hike that was scheduled for this month. The main issue here is the upcoming meeting of the Federal Open Market Committee (FOMC) in November. Analysts will determine whether or not a drop in the sale of durable goods hints at a slowing domestic economy. If they deem this to be the case, they are likely to be much more averse to raising interest rates at all. In fact, there could even be some sentiment that points to lowering rates before the 2017 fiscal year begins. This would be the preferred approach when compared to forcing the dollar to face stronger headwinds against other currencies such as the euro and the pound. Although an interest rate reversal would certainly not be unheard of, what would this mean for Forex traders and how can they capitalise on any downward adjustment?
The Two Scenarios to Look Out For
The first scenario (which tends to be more likely) is that the dollar will enter into bearish territory. This could be accompanied by sluggish prices of durable goods and static employment data. In such an instance, it is very likely that dollar-savvy investors will hold off taking any major action until there is a firm signal that a rate hike is in the works.
However, we still need to look at the other side of this proverbial coin. Consumer confidence remains quite high and home sales have exceeded the July expectations of 0.7 per cent (1). There is also an additional $16 billion dollars of credit within the American marketplace; allowing for a considerable "buffer" against the durable goods data recently released. Expansion within the private sector is another aspect to consider. These metrics could very well signal a more bullish stance towards the dollar.
Looking Towards the November Policy Meeting
It is unlikely that we will see any major Forex movements in relationship to the dollar between now and November. Investors will instead take a watch-and-wait approach until there are firmer signals to be appreciated. However, it is not very probable that any type of rate hike will be seen. We should instead witness a continuation of the current monetary policy or perhaps even a slight drawback. Either of these cases would inevitably signal a hiatus from the dollar into other currencies such as the euro and the pound.
We should note here that we have not taken into account other extraneous factors such as economics within the European Union or post-Brexit effects. In other words, this article has focused upon the domestic economy of the United States alone. Should we see major movements in other international currencies, the dollar could very well still be an attractive asset. Forex traders will therefore be watching the news quite closely as we approach the end of 2016. The next six weeks are predicted to be quite pivotal in terms of influencing investment strategies for 2017.