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US Federal Reserve gives dollar a boost in optimistic speech

The US dollar has continued its good week after the country’s central bank released a positive overview of the economy’s performance.

The Federal Reserve’s monetary policy meeting did not lead to a rise in interest rates, although the market had already priced this outcome into its thinking given that there was a rate rise at the last meeting.

Instead, the significance of yesterday’s announcement lay in what it suggested about the future.

The Fed has already indicated that it would like to raise interest rates twice across the rest of 2018, and the positive outlook which Chair Jerome Powell and other policymakers gave yesterday indicates that this is still on the cards.

“Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low,” the Fed said in a statement after the decision.

“Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2%.”

The Fed’s perspective also took long-term inflation risks into account. “Indicators of longer-term inflation expectations are little changed, on balance,” it said.

As a result of these developments, the dollar surged to recent highs in the markets.

Its performance against the .DXY measurement basket of six other currencies went up by 0.3% to a position of 94.863.

The USD/EUR pair also performed well. The euro went down by 0.3% to $1.1626 over the course of Wednesday, which constitutes a serious drop for the currency.

There’s still a lot for the forex markets to take into account both for the rest of this week and into next week.

Following the Bank of Japan’s announcement on Tuesday and the Federal Reserve’s decision yesterday, the last of three major central bank decisions takes place on Thursday.

Unlike the other two meetings, however, the Bank of England is expected to move forward with an interest rate rise for Britain. The rate, which currently sits at 0.5%, is expected to go up to 0.75%.

Other major decisions which are on the cards for Thursday include year-on-year Eurozone producer price index data, as well as a range of regular US data releases including factory orders for June, initial jobless claims for parts of July and more.

Friday, meanwhile, will see both Italian and Europe-wide month-on-month retail sales data released, while data on average hourly earnings for July in the US will also be published.

Canadian import data for June will be of interest to the markets, especially in the context of the ongoing tariff issues coming out of its neighbour, the US.

Looking ahead to next week, a civic holiday in Canada on Monday is likely to have an effect on Canadian dollar pairs. In New Zealand, meanwhile, an ANZ commodity price release covering July will be closely watched by investors in the Antipodean currencies.

The Reserve Bank of Australia will also make its rate statement on Tuesday.

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