EUR/USD fell mildly on <strong>Fridaystrong>, as currency traders reacted to relatively hawkish comments from Federal Reservestrong chair Janet Yellenstrong hours earlier, providing a strong likelihood that the USA central <strong>bankstrong> will <strong>raisestrong> short-term interest ratesstrong over the next three months.
Yellen said Fed officials still think the depressive effects of the dollar and energy prices will fade, allowing inflation to return to the 2 percent level.
The tumult cited by the Fed in holding rates steady may lend support to gold, which is often considered a haven asset, as investors and central banks are still adding to their hoard.
When the Fed does decide to raise the rates, its members are saying they believe the economy is strong enough to handle an increase, which is a way to keep inflation in check.
“The Fed is not going to be able to wait with unemployment rates coming down”, Chan said.
ASB’s head of FX Tim Kelleher says December is the more likely option, as in October there won’t be a press conference and if rates are to shift, Ms Yellen will want to talk about it – rather than just putting out a release. Later, they would increase the rates gradually, as the labor market improved and inflation increased.
Meanwhile, St. Louis Federal Reserve President James Bullard said the possibility is open, but cast doubt on an October rate hike. Investors have reduced their bets the Fed would act at one of its two remaining FOMC meetings this year and saw a 40 percent probability of a move by the December. 15-16 FOMC, down from 49 percent on September 21.
Buoyant labour market data would revive expectations of a first USA interest rate rise in almost a decade, after a sharp selloff in global financial markets sparked by worries about China’s economy prompted the Fed to hold fire this month.
As for the inflation rate, it still carries on at a mark which is below the official target set by the Fed’s at two percent and the indications are that it will drop further. An upward revision to USA economic growth figures and the announcement by US Speaker of the House John Boehner that he would resign next month, possibly averting a budget stalemate, also helped United States dollar sentiment.
Q: Do you think it is necessary to raise rates so that you have room to cut them in the future? Spot gold was down 0.5 per cent at $US1,148.6 an ounce at 3:41 pm (0541 Saturday AEST), having climbed 2.1 per cent on Thursday, its biggest one-day rise since January.
“Although the evidence, on balance, suggests that inflation expectations are well anchored at present, policy makers would be unwise to take this situation for granted”, she said in her remarks.