Positive Outcome for US Dollar Hinges on Federal Reserve Interest Rate Decision at End of Month

July 12, 2016 - Written by Frank Davies

STORY LINK Positive Outcome for US Dollar Hinges on Federal Reserve Interest Rate Decision at End of Month

The US Dollar has dropped off against peers recently, with import prices creeping closer to a less advantageous positive range.

Hawkish Fed speeches could carry the day for the US Dollar this month, given that the actual interest rate decision itself for July isn't due until the 27th.

Brexit Forecast to Weigh on Federal Reserve Policy Outlook

Many analysts forecast that the short to medium term prospects for the global economy hinge on the timing of the next American monetary policy move. At the time UK voters went to the polls in last month’s European Union membership referendum, most Fed watchers were convinced that America’s central bank would increase its benchmark interest rate at least once before Christmas, in spite of a disappointing set of May domestic jobs numbers.

However, Britain’s vote for Brexit has changed everything; futures markets now price-in a 98.8% chance that the Fed will opt to maintain its benchmark interest rate at its current banding of 25 – 50 basis points at its next policy announcement, due on 27th July.

There is an implied 1.2% chance that the Fed will trim interest rates back to their record low banding of 0 – 25 basis points and a zero per cent chance of any increase at this decision. The same market now factors in a 76.3% chance that the cost of borrowing Stateside will be at its current level or lower by the end of the year.

Woodford Cites 'Triffin's Dilemma' Regarding Fed Interest Rate Outlook

Legendary British fund manager Neil Woodford of Woodford Investment Management invoked the spirit of the Belgian American economist Robert Triffin to explain the situation in a recent note to investors. In a theory which became known as ‘Triffin’s dilemma’, the Belgian posited that America’s lender of the last resort faced a choice to, ‘either run policy that was right for the US or it could run policy appropriate for the rest of the world’.

Woodford feels that further rate increases may be merited, judging by US domestic data alone. He described America as, ‘one of the rare economic bright spots in recent years,’ and this belief will have been galvanised by Friday’s go-ahead US jobs data.

Woodford went on to explain in his report that earlier this year, ‘the Federal Reserve raised interest rates for the first time in almost a decade in a valedictory move to declare victory over the stagnation that had afflicted its economy ever since the financial crisis. With relatively robust domestic growth and a job market deemed to be approaching full employment, the Fed judged a rate hike to be an appropriate move in monetary policy for the US economy. But it certainly wasn’t what the rest of the world needed.’

If US policymakers choose to concentrate on the positives in their local economy and hint at further interest rate increases on 27th July, then the future forecast for the Buck will be strongly positive. Anything other than this and the Greenback is predicted to flounder.

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