US Fed increases interest rates, markets don't go crazy

Thursday, December 17, 2015

Finally, investors welcomed the long awaited first hike in US interest rates yesterday as the FOMC increased rates by 0.25%, marking the first rate rise since 2006 and putting an end to the historically low rates that have persisted over the past six years. Market participants had priced in the expected Fed move for quite some time and risk assets on the whole shrugged off the decision with the dollar index slipping back to test support at the 50 day moving average after intraday gains attempted to gain a footing above 98.500. 

However, after overshooting yesterday we’ve seen demand for the greenback push the dollar index to an open just below 98.650 and target 99.000 early on this morning as investors digested Janet Yellen’s comments. The additional clarity given by the Fed chair went further in building confidence in the US economy, stating that the central bank expects a gradual path for the increase in the fed funds rate with a close eye on inflation.

Asian equity markets reacted positively to the US rate rise as the positive sentiment from the US session spilled into overnight trading. Japanese benchmark stocks added over 1.5% overnight as risk appetite improved. The encouraging moves higher across global equity markets can be seen as a sign of a job well done for US central bankers, particularly Janet Yellen who after a shaky start to her tenure as Fed chair has managed to communicate the guidance to markets effectively. The Japanese yen weakened for a fourth straight session with overnight moves targeting 122.64 against the dollar and we could see further weakness in the yen over the coming weeks and months as the prospect of higher rates in the US increases demand for dollars as confidence in the US economy builds.

After yesterday’s rate rise investors will be relieved to be moving on from the anxious will they/won’t they outlook that has dominated sentiment over the past few months. Today’s session will see the release of the Philly Fed index, initial weekly jobless claims and the Leading index over in the US after the release of eurozone construction data later this morning. Market participants will be grateful to switch their focus back to the macro data after agonising over the Fed’s outlook for the best part of the year.  

DXY recovers yesterday's losses, trading firmly higher

DXY Curncy DOLLAR INDEX SPOT 2015 12 17 08 31 24

JPY weakens for the fourth straight session

JPY Curncy Japanese Yen Spot 2015 12 17 08 31 07

Events for today

0900

DE

Dec

IFO Business Climate

0900

DE

Dec

IFO Current Assessment

1000

EZ

Oct

Construction Output

1330

US

Dec

Philadelphia Fed Business Outlook

1330

US

w/e

Initial Jobless Claims

1500

US

Nov

Leading Index

Topics: US Fed, JPY, DXY
More from: Kash Kamal