3 Reasons the Fed May Raise Interest Rate

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3 Reasons the Fed May Raise Interest Rates

The Federal Reserve (Fed) is scheduled to announce their interest rates on June 15, 2017 at 13.00. It is estimated that the Fed will raise interest rates by 25 basis points from 1 percent to 1.25 percent.

Meanwhile at the beginning of the month we learned that US Non-Farm Payrolls (US NFP) data for May 2017 showed an increase of only 138,000 in May, well below the economists’ estimate of 181,000. Nevertheless, according to a report from the US Bureau of Labor Statistics the unemployment rate experienced a slight improvement to 4.3%.

Nevertheless, there is an opinion that the disappointing US NFP data will not be a barrier for the Fed to raise interest rates this June. Indeed, the negative data could lead to doubts, but at least three reasons below could be considered as to why the Fed would likely continue to raise interest rates at the meeting on Thursday.

1.Fed is not a retail trader, they are central banks

Yes, the Fed is a central bank that is a policy maker. They are not small traders like us.

After the release of US NFP data at the beginning of this month, USD experienced a weakening. The market seems rather doubtful that the Fed will raise interest rates this month. But it seems rather naive if we think that the Fed will react only to one economic data. A central bank the size of a Fed will certainly see the trend of an economic data.

If noted, US NFP figures are consistently in the range of 100,000 to 300,000 in recent years, while the unemployment rate is in the relatively low range.

2. Commodity prices have the potential to continue to contribute to US inflation

Commodity markets such as gold and precious metals have been moving very volatile lately. There are many factors that influence commodity prices, one of which is inflation. After the end of China’s loose policy, investors seem to be starting to worry about rising inflation.But many investors seem to forget that one of the key factors that can increase the rate of inflation is the weakening of the dollar. We know that the majority of commodity prices are in dollars. In other words, the weakening of the dollar will increase commodity prices.

Donald Trump’s economic policy plans such as tax cuts, simplification of regulations and improvement in infrastructure development have boosted the post-election USD. This is because there is a thought that these things will be able to provide energy for the economy of the United States (US). But Trump’s economic agenda seems to be stalled.There have not been any signs that Trump will realize the stimulus in the near future, so we may not yet see a sharp strengthening in the USD in the near future.

3. The ADP Non-farm payrolls data will not be ignored

The US private sector added a significant number of workers last month.In May, the private sector recruited 253,000 workers, far exceeding economists’ estimates of 180,000.

This private sector activity indicates that the US labor market is actually still in good condition and in a positive trend. The slowdown in US NFP figures could be because the US government does not recruit too many employees in the middle of the Trump government.

What are the opportunities?

For short-term forex trading opportunities, currently our choice falls on GBPUSD because based on the data we have, the pair’s volatility is highest among other major currency pairs at least in the past year.

For medium-term trading , our choice also falls on GBPUSD so far fundamental and technical factors can still be said to be in line. We know that around the past week the UK has just held an election and the results have given a negative sentiment to GBPUSD. Until now, the medium-term outlook for GBPUSD is still bearish.

If this still negative sentiment is reinforced by rising Fed interest rates – which means strengthening of the USD – then the bearish outlook for GBPUSD is expected to strengthen. This combination of fundamental and technical factors is likely to bring GBPUSD lower for the medium term.

Whatever forex strategy you will apply, make sure you have a trading plan and use capital management and proper risk management.

Happy Trading.

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