- The US Federal Reserve left is key rate unchanged again at the conclusion of its September meeting earlier this week.
- While some registered surprise by this development, the reality is it fit with what Chairman Powell and the Fed Governors have been saying for months.
- Global currencies have been trading on their own, as one would expect, only partially paying attention to moves by central banks from around the world.
I’ve only been half paying attention to all the chatter surrounding this week’s announcement that the US Federal Reserve was leaving its Fed funds rate unchanged, still sitting in the 5.25% to 5.5% range. One of the best phrases to come out of growing din was “hawkish pause”. I like that. It fits well with what we saw and heard not only this month, but for months leading up to this week’s announcement.
If we go back to this past June when the Fed left its rate unchanged, US Fed Chairman Powell said we should be expecting two more interest rate hikes during 2023. We saw the first one in July with a 25 basis-point move before the Fed sat still during August and September. There are still two meetings on the docket, the first running from October 31 through November 1 and the second from December 12 through 13.
The one statement that did seem to draw some attention this week was when Chairman Powell added that any possible rate cuts could be pushed back deeper into 2024. Not only that, though, but the Fed could possibly raise rates once or twice early in the new year. This was something new, with the Fed funds forward curve indicating traders are viewing the March 2024 meeting (19 though 20) as a possible rate cut. If so, that means we might be looking for rate hikes at the end of both January and February meetings.
The other point that continues to come up is the persistence of global inflation. Yes, I said global, for as much as some want to make this a US problem[i], it is indeed something the world continues to deal with. A week ago, the European Central Bank (ECB) hiked its key rate another quarter percent. Since then, the debate has had a familiar ring to it with some saying hikes are done and others saying there are more to come. On the other hand, the general consensus seems to be a rate hike shouldn’t be expected until at least July.
This would make sense if the US is indeed still the leader of financial markets. This has also been up for discussion for a number of years, along with the idea the US dollar would fall out of favor as the global currency of choice in favor of Bitcoin, or some other crypto-currency flavor of the month.
How have global currencies reacted? There is a belief out there that the US dollar only firmed after Chairman Powell announced the “hawkish pause”, but that isn’t quite true. The US dollar index ($DXY) hit a new 4-month high, beyond the previous mark of 104.70, on September 5. This confirmed the greenback was in a long-term uptrend on its monthly chart, a move that could be viewed as a Green Knight riding in to battle the dragon known as inflation. The USDX extend its rally this week to challenge the 2023 high of 105.88 from March.
The flip-side of the global coin, the euro (EURUSD), has been showing signs of a possible long-term top since this past July. As with the US dollar index, the euro hit a new 4-month low below 1.06354 on September 14 before extending its break to 1.0615 Friday (September 22).
The bottom line is long term trends of global currencies were not determined or changed by central bank moves from around the world. Now we’ll sit back and watch to see what happens over the coming days (again, the end of the quarter is soon upon us), weeks, months, and years.
[i] Even when we narrow the discussion to the US, few want to talk about the root cause of the situation.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
