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Week Ahead - Dollar Drops After Rate Hike

The USD is weaker against major currencies across the board after the Fed hiked rates for the third time since the financial crisis but lacked upgrades to the economic projections. A proactive but patient Fed, with other central banks standing pat, meant the forward looking FX market came away with a less hawkish view on future US interest rates and sold the USD despite a 25 basis points hike to the benchmark rate. Fed member speeches during the week will give the central bank the chance to add more clarity into the FOMC statement and Chair Yellen’s press conference.

The Office for National Statistics in the UK will release the monthly inflation data on Tuesday, March 21 at 5:30 am EDT (9:30 GMT). After the Bank of England (BoE) held interest rates at 0.25 percent the minutes from the policy meeting showed members discussed raising rates if inflation accelerated. The lone dissenter in the BoE Kristen Forbes voted for a rate hike as she felt inflation was rising quickly and would remain above the BoE’s target for at least 3 years. A higher inflation indicator on Tuesday would appreciate the pound as higher UK rates could happen sooner rather than later. UK retail sales data will be released on Thursday, March 23 at 5:30 am EDT (9:30 GMT) with a forecasted gain of 0.4 percent that could restore confidence after a drop last month.

The Reserve Bank of New Zealand (RBNZ) will publish its rate decision on Wednesday, March 22 at 4pm EDT (8pm GMT). Analysts expect the rate to remain unchanged at 1.75 percent after a disappointing fourth quarter GDP has reduced the probabilities of a rate hike in the short term.

The EUR/USD gained 1.201 percent in weekly trading. The single pair is trading at 1.0750 after the Fed hiked interest rates by 25 basis points for the first time in 2017. The market had already priced in the central bank move after heavy handed signalling from Fed members. Investors had become used to ignoring Fed comments and forecasts as for the past two years there was the promise of multiple rate hikes and in reality only 1 hike per year was delivered. The Fed had to change its communication strategy to avoid catching the market off guard as the CME FedWatch tool showed very low probabilities of a rate hike March as late as mid February.

The hype created by Fed officials was made into reality on March 15, but without further guidance and with a statement laced with less hawkish undertones investors sold the US dollar. The greenback is down against all majors ahead of a quiet week for US economic indicator releases. Fed Chair Janet Yellen will speak at a research conference in Washington on Thursday, March 23 at 8:45 am EDT (12:45 pm GMT) giving her another turn to comment on the central bank forecasts for US growth. Fed members Charles Evans, William Dudley, Neel Kashkari and Robert Kaplan are all scheduled to speak this week and could use the opportunity to clarify their stance on the central bank’s rate path that triggered a drop in the USD after the March monetary policy meeting.

XAU/USD gained 2.29 percent in the last week. The price of gold is trading at $1,229.42 as the USD retreated and political risk with a potential trigger of Article 50 in the coming week making the metal an attractive safe haven. The fact that the elections in the Netherlands did not signal an advance for eurosceptics did little to stem the anxiety regarding upcoming Brexit and the looming French elections where Marine LePen has a higher chance than the Dutch far-right candidate Geert Wilders did.

A rise in gold prices in the same week that the Fed announces a rate hike is not that common but the way the central bank communicated the impending March rate hike had investors changing expectations. The Fed might have oversold their hand as it only delivered a rate hike of 25 basis points, but kept forecasts unchanged which was taken as less hawkish than anticipated taking into account the Fedspeak that saw the market switch from 20 percent probability of a rate hike to 93 percent in three weeks.

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