June 19, 2015
|USD vs CAD||
In a meeting on Wednesday, the United States Federal Reserve decided to keep its benchmark interest rates near zero but central bankers believe improving US economic growth is likely to warrant one or two interest rate increases before the end of the year. The Fed will take many economic indicators into account before raising the interest rates, first time since 2006. The significant correction in oil prices has led to downward pressure on the US inflation rate. The Fed has been insisting that the tumbling inflation rate is largely a temporary result of weak energy prices. The inflation rate was recorded at 0 percent for the month of May after falling to -0.2 percent in the month of April, first time into negative territory since 2009. The core inflation rate (which excludes some volatile price items) came out at 1.7 percent . The US housing market is also showing signs of strength and annual pace of permits for new construction, a sign of future demand, rose 11.8 percent to 1.28 million, the fastest pace since August 2007. Improving labor market, housing starts and slightly increasing inflation will further help the Fed to make its decision sooner rather than later. The Eurozone is already facing muted or negative growth and now with the Greek debt default crisis on the loom, it would be very difficult for them to handle an interest rate increase from the US. In case the Fed decides to raise interest rates during their next meeting in July or September, investors would obviously prefer to invest in “safer” US dollar denominated investments (with a higher yield) than investing in the troubled Euro area. This could further strengthen the USD against many currencies and also virtually push some countries in Eurozone into the recession. The Fed has four meetings left for the year and according to a survey released by the central bank, only 2 out of 17 Fed officials believe that the bank should wait until 2016 to raise the rates. This clearly shows the increased confidence of the Fed officials in the US economy and now the question remains if they are going to raise interest rates once or twice this year?
Source- Bloomberg, Globe Investor Gold, Financial Post, Market Watch, Trading Economics