Finally the Fed has delivered and we now officially enter the US tightening cycle following their hike of 0.25% from 0.25% to 0.50%, the first since June 2006. Whilst the vote was unanimous and short-term interest rates on US Treasuries spiked, causing a brief bout of dollar strength with GBPUSD initially dipping below the 1.5000 level, a flattening of the yield curve following the decision showed that short-term rates might be higher, but long-term rates are not in a rush to rise as the prospects for rate hikes in 2016 have remained largely unchanged.
Janet Yellen’s conference confirmed the Federal Reserve’s dovish stance with references to a softening of the labour market’s progress over the medium term, which led to a reversal of the initial of dollar strength, causing GBPUSD to test 1.5100, pushing crude prices lower and equities higher. The reaction from the dollar shows there’s little appetite to push the greenback higher, suggesting that the best of the dollar gains in the major currency pairs have been realised. Whilst we have finally reached this landmark decision, the debate will continue to rage in respect to the path of interest rates, but what is clear is that normalisation is still a long way off.