US equities and the US dollar squeezed lower yesterday as markets beginning to wobble in the face of mounting uncertainty. The uncertainty has been brought about by both political and economic factors.
Politically, president Donald Trump has stirred the pot with his executive order on migration which has led to many stranded at US airports a they await their fate after Trump instilled a ban on citizens of 7 countries, preventing them from entering the US. In addition, Trump has yet again alluded to the USD being overvalued, sighting Japan and China as being culprits of devaluing their currencies to stimulate exports at the expense of the US.
Economically, investors are also cautious of tonight’s FOMC release which has seen traders look to square positions before the event in which the Federal Funds Rate (expected at <0.75) and the FOMC statement is released. These factors saw the USD Index, a measure of the value of the USD against a basket of other currencies, dip below the all-important 100 level as we are now seeing DEC 16 lows being tested.
The president of the Federal Reserve Bank of America (FED) has been adamant that this year might see 2 to 3 rate hikes which markets have responded to by bolstering the USD over the last few months to multiyear highs. Investors will be looking to see if the Federal Funds Rate is changed at this meeting, with an increase likely to see the USD gain momentum as heavy buying enters the market while a cut of the interest rates would result in the USD falling aggressively as trader’s price in the lower interest rates. The most likely outcome, however, is that the interest rate will remain unchanged and all eyes will be on the FOMC Statement. Investors will scrutinize the statement for any comments which allude to the upcoming monetary policy the FED will be employing. Should the statement be upbeat, with strong cause for an imminent rise in interest rates, then we would see the USD strengthen while US equities weaken. On the other hand, should the statement be a negative one, in which the FED views economic conditions as unfit for a rate hike in the near term, we would see the USD weaken and equities continue to climb as investors take advantage of the cheaper money for longer.