Published: Thu, May 11, 2017
Money | By Armando Alvarado

Fed June rate hike odds jump after policy statement

South Africa's rand weakened against the dollar in early trade on Thursday as the greenback rallied on the back of the hawkish U.S. Federal Reserve statement, pushing emerging market currencies lower.

Activity in the USA service sector grew at a faster than expected rate in the month of April, the Institute for Supply Management revealed in a report on Wednesday. Fed officials have signaled that they expect two more rate hikes this year, in addition to the one increase they made in March.

The statement acknowledged the drop in the core PCE price index but the central bank retained their stance that inflation has been close 2% targets and is expected to reach the target over the medium term.

The Fed usually raises interest rates in strong economic times, which then has the knock-on effect of raising the demand for the USA dollar and jumping up its value. The pair was boosted by an optimistic Fed statement today and is seen nearing important resistance.

Higher rates would reduce demand for non-interest bearing gold and would also make the dollar-denominated metal more expensive for buyers paying with other currencies.

The New Zealand dollar declined as the US Federal Reserve gave an assessment of US economic growth that was in line with expectations, keeping open the prospect of another hike to US interest rates in June.

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In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

"Last night the Fed rate decision was nearly exactly as expected with a slight hint towards hawkishness", Standard Bank trader Warrick Butler said.

Futures traders are now pricing in a 72 percent chance of a June rate hike, from 63 percent before the Fed's statement, according to the CME Group's FedWatch Tool.

Economists have largely attributed the weak first-quarter GDP reading to recurring issues with the calculation of growth during the January-March period and linked the pullback in hiring to weather. Policymakers are also gearing up to announce sometime this year when and how the Fed will begin shrinking its $4.5 trillion balance sheet, according to minutes from the March meeting.

Fed officials will hold their next policy meeting on June 13-14.

"Given all the uncertainties they still face and especially with growth coming in so weak, the less the Fed says at this meeting, the better", said Diane Swonk, chief economist at DS Economics.

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