WEEKLY REVIEW: to raise interest rate further or not – the Fed’s difficult decision
11.03.2016, 17:08

WEEKLY REVIEW: to raise interest rate further or not – the Fed’s difficult decision

Market participants are awaiting the Fed's interest rate decision next week. The continued improvement of the U.S. labour market is one argument for a further interest rate hike. Inflation remained at low levels but as oil prices climbed in the recent weeks, inflation is likely to rise. And oil prices could rise further. The International Energy Agency (IEA) said in its monthly report on Friday there were signs that oil prices reached their bottom. The agency also said that OPEC's and non-OPEC's output dropped in February.

But there is a vicious circle. If oil prices rise, the U.S. oil producers could raise its oil output, increasing the number of the active oil rigs, and oil output, which would weigh on oil prices. An agreement on the freeze of the oil production is needed.

OPEC and non-OPEC countries planned to meet in Moscow on March 20 to discuss the freeze of the oil output. But Reuters reported on Thursday that OPEC and non-OPEC countries would not meet on March 20 as Iran did not say if it will participate or not. That could weigh on oil prices.

Fed officials are also divided. It is unclear if the majority of the Federal Open Market Committee (FOMC) would support further interest rate hike in March.

The Fed is likely not to raise its interest rate in March, and is likely to wait and analyse the situation around the global economy, especially the economy in China, and further stimulus measures by the European Central Bank (ECB). The ECB on Thursday cut its interest rate to 0.00% from 0.05% (this decision was not expected by market participants) and deposit rate to -0.4% from -0.3%. The ECB also expanded its monthly purchases to €80 billion from €60 billion, to take effect in April. Purchases will include non-bank corporate debt. The central bank will launch further four targeted longer-term refinancing operations (LTRO).

My opinion is that the ECB's would not help to boost the economy and in inflation in the Eurozone. Reforms are needed. The monetary policy alone would not help. Interest rates in Japan are low for decades, and the economic growth and inflation remained at low levels.

It is likely that the currency pair EURUSD will rise toward the resistance level at $1.1300 or at $1.1400, if the Fed will not raise its interest rate further or there will be negative news from China and there are no negative economic data from the Eurozone.

If the Fed hikes its interest rate further and in case of the negative economic data from the Eurozone, the currency pair EURUSD may test the support level at $1.1000 or $1.0900.

  • Name: Konstantin Meinhardt
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