Rate hike would be the eight increase since December 2015
The US dollar started to rally on Friday, ahead of an expected interest rate rise by the US Federal Treasury Reserve later this week. The Federal Open Market Committee (FOMC), the entity that determines the direction of US monetary policy, will meet on Tuesday and Wednesday this week, before announcing their decision early Thursday morning Australian time.
Financial markets are factoring in a 100 percent chance rise the in Federal Funds on Thursday, from the current 1.75-2 percent target, to a 2 – 2.25 percent target.
Policy makers are expected to raise rates due to ongoing strength in US economic reporting, with GDP growth, unemployment, and wage growth all looking quite attractive. According to the Federal Reserve Bank of Atlanta, the third quarter GDP could be a repeat of the second quarter, with growth exceeding 4 percent – well beyond the 3 percent target announced by President Trump.
However, interest rate rises have historically been used to target inflation, and most US measures of inflation remain subdued. In fact, the expected interest rate rise will take the US interest rate target beyond most measures of inflation for the first time since 2008.
With the rate rise expected, traders and investors will be looking for any indication in the language or content of the FOMC statement that further rate rises will progress at a quicker or slower pace than expected. Central to this are the much-publicized “dot plots”, which show the future interest rate expectations from FOMC policy makers.
Whilst a US rate rise would usually be a bullish event for the US dollar, the fact the rise has already been factored in leaves the US dollar movements a little more uncertain. Regardless, as long as the FOMC statement retains a fairly ambitious outlook on future rate rises, it is likely the US dollar will see some strength – which is also likely to be bearish for our Australian dollar.
Recently a falling Australian dollar has helped to push the Australian stock market higher, and with the Australian dollar coming off a short-term high, on a longer-term downtrend – I feel there is a fair chance of both a fall in the AUD, and a rise in Australian equities as a result of Thursday’s US interest rate announcement.
If you are interested in trading the AUD/USD currency pair, or Australian or US stock market indices, you can gain a leveraged exposure by using mini-warrants. If you would like more information on trading these or other underlying assets using mini-warrants, don’t hesitate to contact your TradersCircle advisor on 03 8080 5788.