Discounting the Fed Hikes

Fed Chairman Jerome Powell commented in a speech yesterday that the central bank is “a long way” from getting rates to neutral, and that the Fed no longer needs the policies that were put in place to pull the economy out of the financial crisis. Powell’s statements were interpreted by the markets as a sign that more interest rate hikes are coming.

Remember that one of the tenets of fundamental analysis is that prices react to new information and that traders tend to discount their expectations about the future into the price. Also note that interest rate hikes tend to increase the value of the currency given that it is now more profitable to invest in it due to the carry trade. In anticipation of an interest rate hike, traders could start purchasing USD given that they expect it to rise. This would result in a preliminary increase in the exchange rate, in anticipation of the rate hike.

This can be viewed in the USD behaviour following Powell’s comments. As the four currency pairs in the above picture show, markets have discounted this information and the US Dollar has increased compared to the Euro, the Yen, the Loonie and the Ruble, and other currencies not included here. An interesting question is whether this appreciation will be persistent or not. The answer is that if we could somehow freeze all data and all speeches from happening and no other pieces of information entered the price, then the level observed would most likely persist. Naturally, freezing news announcements is not an option, hence there is no way to tell whether the price will remain at the same levels, given that new information has not yet arrived. Still, what matters is that traders need to be aware that markets tend to discount information and hence be ready to either exploit it or protect themselves against it.

Click here to access the HotForex Economic calendar.

Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding on how markets work. Click HERE to register for FREE! The next webinar will start in:

Dr Nektarios Michail

Market Analyst

HotForex

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in FX and CFDs products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.