It’s no secret that the US Federal Reserve is going to raise interest rates from 1.25 percent to 1.50 percent in tomorrow’s board meeting so what happens to the US dollar after this? Are we in for a rally or a pullback on some quick profit taking?
The Fed has now raised rates 5 times since 2015 and if we study the direction of the US dollar after each hike we can see that there is no clear pattern meaning that a rally or a retreat is possible after the rate decision.
One thing that may be different this time, is the rate decision coincides with some big policies from the Trump administration which in theory is supposed to further bolster the US economy which in turn should benefit the greenback.
One such policy is passing the tax legislation through congress which is seen as a great milestone for the US economy as some predict this will take some pressure of the Fed and they will be able keep to their agenda by raising rates at least 3 more times next year.
So the point is that we can safely say that a rate hike is already priced into the US dollar as we speak, so for the currency to push higher we need another trigger, so the fact that the main pillar of Trump’s policies, namely US tax reform which is certain to pass may just be the catalyst.
“Although we do not expect (Fed chair) Janet Yellen to overly modify her choice of judicious language, (President (Donald Trump‘s) ...tax cuts ... could feasibly allow far greater conviction in the speed with which policy normalization should proceed,” said Neil Mellor, senior currency strategist at BNY Mellon.
So with tax legislation certain to pass, a bullish statement on the US economy from the Fed may follow the rate decision which should see the US dollar benefit.
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