The USD has found its feet after a brief sell off on last night’s interest rate announcement. The Fed announced that it would increase the interest rates to 1.25% from the current 1% level as largely expected. Further, the FED announced that 8/16 of its members expect another one rate increase of .25% this year, while 4/16 seeing a minimum of two. Markets showed little interest in the release and only once Yellen took the podium and struck a hawkish tone, did they begin buying the USD as GOLD and equities slid. Yellen, was surprisingly optimistic on the economic data out of the US, despite several key indicators failing to impress. A large burden was thrown on inflation data and we expect inflation data to be the key driver going forward after Yellen said that the FED expects inflation to move up in the coming months. The USD will appreciate with an increase in inflation while a slowdown in inflation will see the USD slump as traders begin to fade any hopes of further rate increases this year.
Today sees the BOE and the BOJ take center stage as markets shift their attention to their announcements and decisions. The BOE is largely expected to keep rates on hold and markets will be more interested in the release of the Monetary Policy statement, which if the BOE strikes a hawkish tone, would result in a strengthening of the GBP across the board, while a more dovish tone would see the GBP sold off.
The BOJ is also expected to keep rates unchanged but markets will be focused on the Monetary Policy Statement, as they for clues as to the BOJ`s views on the current strength of the JPY and the level of inflation in the economy. Should the BOJ strike a more hawkish tone, talking up the improvement in inflation of the economy, we would see the JPY strengthen further. However, should the bank strike a more dovish tone regarding inflation or show dismay at the stronger JPY, we would see the JPY sold off aggressively as traders try and align themselves with the BOJ`s views.