by Ed Wijaranakula, NMS Investment Research
The U.S. Dollar index (DXY, pronounced "dixie"), practically the USD/EUR exchange rate, shot up 1.28% immediately following comments from Stanley Fischer, Vice Chairman of the U.S. Federal Reserve, in an interview with CNBC shortly after the speech by Federal Reserve Chair Janet Yellen at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming on Friday. Fisher told a CNBC reporter that the central bank could possibly raise interest rates twice before the end of 2016, depending on the strength of economic data released in the coming months.
Many Fed observers believe that Fisher's comments overshadowed the earlier remarks from Yellen, who said, "In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.". The FX market interpreted Yellen's remarks as the odds of an interest rate hike were roughly even for the Fed's December policy meeting.
Overall, U.S. economic growth remains tepid, as the U.S. Bureau of Economic Analysis revised the U.S. second-quarter GDP (second estimate) to 1.1% on Friday, from the previous 1.2%. Orders for nondefense capital goods excluding aircraft, or core capital goods, have been in recession since the first-quarter 2015. Higher-than-expected manufacturers' inventories of durable goods prompted the Federal Reserve Bank of New York on Friday to trim its U.S. GDP forecast for the third-quarter of 2016 to 2.8%, from the previous 3.0%.
The probability of a 25 basis point rate hike at the next FOMC meeting on September 21 is 36.0%, while the probability of a no change in monetary policy stands at 64.0%, based on the CME Group 30-day Fed Fund futures prices as of August 26. From the Fed's "Dot-Plot", or the FOMC's participant survey, the Fed Funds target rate is between 0.75 and 1.0%, meaning two more rate hikes are possibly on the table this year.
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