Which assets can best tell the actual impact of Fed’s recent hike?

The EUR/USD pair rises, benefiting from the weaker performance of the US dollar following Fed’s policy decision. The Fed hiked rates by 25 bps as expected to 5.25-5.50%, its highest in 22 years, meanwhile, all eyes are focusing now on ECB’s decision on Thursday, expected to deliver a 25 bps hike.

The EUR/USD pair is trading positive after 6 consecutive days of losses, precisely at 1.1090 and 0.37% gains during the session. As expected, the Fed hiked rates by 25 basis points and is positioned in the 5.25%-5.50% target. However, during the press conference, Chair Powell did not commit to a hike in September as ongoing decisions will depend on incoming data.

Regarding the economic assessment, Powell noted that economic activity and the labour market remain robust but that inflation remains too high. The Dollar Index, DXY, index fell to 101.030, showing a decrease of 0.26% on the day. Additionally, the US treasury yields on 2, 5 and 10-year are in negative territory at 4.85%, 4.11% and 3.87%, respectively, and applied further pressure on the USD.

Regarding Thursday’s European Central Bank (ECB) decision, markets have largely priced in a 25 bps hike, and investors will look for clues regarding forward guidance. As for now, the odds of a hike according to the World Interest Rate Possibilities (WIRP) in September fell below 50%, but in October and December are largely priced in, so messaging will be key.


On the other hand, the USD/CAD pair is sidelined on the front side of the bearish trend and has not been rattled by what was a rather benign outcome form the Fed meeting. Analysts said the FOMC meeting was as expected, with Chair Jerome Powell playing it close to straight down the middle between hawkish and dovish on the rates outlook going forward.

The Canadian dollar weakened against its US counterpart on Wednesday as oil prices fell and investors assessed prospects of additional tightening by the Fed in September following the US central bank’s latest rate hike.

The Canadian dollar was trading 0.4% lower at 1.3215 to the US dollar, or 75.67 US cents. It touched its weakest intraday level since July 18 at 1.3237 before clawing back some of its decline.

Wall Street seesawed and bond yields fell as Powell said at a press conference that the Fed will be making decisions on monetary policy on a meeting-by-meeting basis. Earlier, the central bank raised its benchmark overnight interest rate by a quarter of a percentage point to the 5.25%-5.50% range.

The Bank of Canada has also been raising interest rates. It discussed delaying a hike at the last meeting before deciding on a hike to ensure progress in dampening inflation did not stall, according to minutes of the meeting that were published on Wednesday. The price of oil, one of Canada’s major exports, settled 1.1% lower at $78.78 a barrel after US crude inventories fell less than expected.

Canadian government bond yields were lower across the curve, tracking moves in US Treasuries. The 10-year eased 7.5 basis points to 3.440%.

Gold prices have been impacted by the Fed’s rate hike. The Fed will consider additional firming to curb inflation and reduce bond holdings. Tighter credit conditions are likely to weigh on economic activity, hiring, and inflation, but the extent remains uncertain.

Recent indicators suggest economic activity has been expanding at a moderate pace, and the Fed will continue to assess additional information and its implications for policy.

The banking system is sound and resilient. Interest rate futures suggest a chance of a Fed hike at 18% in September, 36.5% in November post-FOMC, and a probability of a hike at 37.3% in November pre-FOMC.