Factoring in the Fed Interest Rate Decision - Where to now for the US Dollar?

By: Regent_Markets

Wall Street leapt higher last week after the Federal Reserve calmed investors' fears about a sinking economy, implying that risks to the financial markets from the summer's credit crises have eased, says BetOnMarkets.com's Michael Wright.

Stocks initially zigzagged after the Fed lowered interest rates on Wednesday, because some investors balked at the notion that the Fed might not lower rates again at its December meeting. However, investors eventually appeared relieved after interpreting the Fed's comments to mean that the central bank is now able to return to more 'regular' worries such as price inflation.

Wall Street was pleased by the fact that investors, businesses and consumers alike will be getting cheaper access to cash, because of the widely anticipated quarter-point rate cut. The Fed funds rate now stands at 4.50 percent. Last month, the Fed surprised the market with a larger-than-expected half-point cut in the funds rate.

After months of agonising over a weak credit market, investors appeared to take some comfort from the fact that the Fed found room to offer a less accommodative statement than some had expected. In comments following its two-day meeting, central bank policymakers said recent spikes in energy and commodity prices, are among the forces that could be adding to inflationary pressures, and that with its latest move "the upside risks to inflation roughly balance the downside risks to growth."

While a more accommodating statement would have left the door open for yet another rate cut, traders worried about what would happen to the US dollar if there was another cut. Some analysts have gone on record to point out that the recent surge in the oil prices have been partially attributed to the weaker US dollar.

The focus remains on the once mighty US dollar, which now trades just shy of 2.08 against the British Pound, and near an all time high of 1.45 for every Euro. The Bank of England's chief economist was rather hawkish in his latest comments, dashing many people's hopes of a rate cut here in the UK. This coupled with the US cuts, has pushed the USD/ GBP exchange rate ever closer to 2.10.

The Fed's latest statement has been labelled as "subtle as a sledge hammer" by some economists, for the bold way it indicated that this was the last cut for a while. This coupled with indications from the Bank of England that they won't move on rates this side of Christmas, could present an opportunity.

We're still a long way off the dizzy heights of the 70s and 80s when you could get around $2.64 to the pound at its peak, so there is certainly room for higher levels. The Fed may be done cutting for now, but this doesn't mean that the dollar will rebound. Given the hawkish comments from the MPC it is possible that the Dollar could keep sliding against the pound or at least may not strengthen considerably in the short term.

With the above information, the average trader can use BetOnMarkets.com to take full advantage of this situation. A no touch trade compensates a trader for correctly predicting that the market won't touch a certain point in the future, within a set period of time.

A no touch trade on the GBP/USD with a 20-day term, and a trigger set at $0.06 cents lower than today's level, pays around 11%. This means that the exchange rate could rise, stay where it is, or drop as much as another $0.055 cents, and you could still win.

By Karen
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