An end to Zero Rate Era -by Michael Oyebamiji

December 17, 2015 by

Last night, the Federal Reserve put an end to the zero interest rate eras by hiking interest rate by 0.25%. This is the first hike in almost a decade. The move was long overdue because the economy has seen a substantial recovery in major parts of the economy especially the labour market. According to the Fed chairman, progress has been made on jobs, economy is doing well hence the need for and hike. Although she also highlighted there are still some slacks in the jobs market but it will be eroded overtime and inflation is also expected to rise to target as transitory effects from low oil will dissipate over time. Further rate hike is expected to come gradually but it will be data dependent.

The market was well prepared for this hike has there was no major move in the market that was not anticipated. We saw Eurusd dropped down to test the lows before rallying back to the upside again to test the 1.10 level and indices continues to rally just as expected. C commodities as well dropped to the downside on the back of the rate hike.

I expect USD strength to continue in the next couple of trading sessions on the back of the rate hike. This is because the USD seems to be the only stable currency at the moment. GBP has a lot of uncertainty especially the success of forward guidance policy of the Bank of England seems not to be working as expected. Also Eurozone might need some more easing measures to support the economy which will potentially weaken the Euro. This is why I remain bullish on USD for now. Also, I expect commodity prices to test the lows again; gold prices should drop back to test the lows of the year at $1045.