The US Federal Reserve surprised markets on Wednesday when the FOMC statement sounded more hawkish than what analysts were expecting. The statement specifically referred to what information the committee will be assessing at its next meeting, suggesting that a move in December is a strong possibility. The dollar index jumped by 1.5% after the statement as many investors had ruled out a rate rise this year.
In the statement, the FOMC said that the risks to economic outlook and the labor market are “nearly balanced” and no longer appeared concerned about the impact from the recent developments in China and in financial markets. Futures markets were quick to adjust market expectations with the implied probability of a December rate hike rising to 43% from 30% prior to the statement.
The dollar surged to 121.25 yen from around 120.47 yen prior to the release. It has since eased to around 120.76 yen in today’s Asian trading after Japanese industrial production rose by more than expected in September. Industrial production rose by 1% month-on-month last month after falling by 1.2% in August. Estimates were for a 0.6% drop. The better-than-expected data may reduce the possibility of further easing by the Bank of Japan when it meets tomorrow.
The euro slumped from around 1.1060 dollars to 1.0896, but has rebounded to around 1.0930 dollars on Thursday.
Sterling was also down, hitting a low of 1.5248 dollars but it firmed to 1.5274 dollars after stronger-than-expected house price data from Nationwide. The Nationwide house price index showed prices rising by 3.9% year-on-year in October against estimates of a 3.8% rise.
The New Zealand dollar briefly recovered against the greenback after the Reserve Bank of New Zealand decided on Thursday to keep its official cash rate unchanged at 2.75%. But it soon headed down again after climbing to 0.6716 dollars as the central bank maintained its easing bias. The statement said that while dairy prices have gone up in recent weeks and growth in the services and construction sectors remain robust, the kiwi’s recent appreciation might warrant a lower interest rate path. The kiwi was down at 0.6663 in late Asian trading.
Crude oil prices fell back on Thursday after surging 7% yesterday on a bigger-than-expected drop in gasoline and distillate inventories. US oil futures came under pressure from the Fed’s hawkish language and were down by 0.6% at $45.66 in late Asian trading. Gold prices also fell after the Fed, reversing earlier gains to $1182.82 on Wednesday to trade around $1157 on Thursday.
Looking ahead to the remainder of the day, all eyes are expected to focus on US third quarter GDP data, which is estimated to have expanded at an annualized rate of 1.5%. A stronger figure would further raise expectations of a December rate hike following yesterday’s FOMC statement. Also out today are German flash inflation data for October.