UNITED STATES FEDERAL RESERVE RAISES BENCHMARK INTEREST RATE 0.25 BASIS POINTS AND LOOKS FOR ONE MORE RATE HIKE IN 2017

U.S RATE HIKE

The U.S Federal Reserve raised the benchmark interest 0.25 basis points this week, marking the second increase in the rate in the last three months.

In a Hawkish policy statement, FED Chair Janet Yellen stated that the labor market strengthened in May, while the overall economy has been rising at a moderate pace this year. In addition, the Fed noted that household spending has been on the rise and business fixed investment is expanding. A decline in inflation below 2% also played into the decision to raise rates.

Federal Reserve policy makers agreed to that based on the current outlook, one more rate hike in 2017 seemed appropriate, and also laid out detail on how they intend to shrink their $4.5 trillion balance sheet this year.

U.S DOLLAR STRENGTHENS

The U.S dollar index continued to strengthen against a basket of currencies after the Federal Reserve rate increase and policy statement, as Janet Yellen indicated further rate hikes in 2017 and 2018 remained likely.

The euro fell to a fourteen-day trading low at 1.1132, after initially reaching a seven-month trading high of 1.1296 before Janet Yellen's Hawkish policy meeting comments.

The U.S dollar also moved higher in the week against the Swiss franc and Japanese yen, with commodity currencies recovering losses against the U.S dollar as the week ended.

BANK OF ENGLAND SURPRISE

The Bank of England kept interest rates at a record low of 0.25% at the June policy meeting, with the Bank of England Quantitative Easing programme remaining capped at 435 billion pounds, despite the surge in the rate of inflation to the highest level since mid-2013.

The main surprise came from Monetary Policy Committee, who voted 5-3 in favour of holding interest rates at their current level, financial markets had been expecting at 7-1 vote in favour of holding rates unchanged.

The MPC members who vote for a hike were the outgoing Kristin Forbes, as well as Ian McCafferty and Michael Saunders.

The British pound moved sharply higher on the news, moving towards the 1.2800 level, as traders priced in a possible rate hike in 2017.

BOJ POLICY REMAINS UNCHANGED

At this month's policy meeting, the Bank of Japan decided to kept interest rates unchanged and maintained the current expansionary monetary policy.

The BOJ pledged to increase purchases at an annual pace of around 80 trillion Japanese yen and maintained short-term interest rate target at -0.1 percent. Japanese policy makers also kept the current economic assessment unchanged, noting the Japanese economy has been turning toward a moderate expansion.

CANADIAN DOLLAR RALLIES

The Canadian dollar rallied sharply this week, as hawkish comments from Bank of Canada deputy governor moved the USDCAD to a three and a half month low.

The USDCAD fell to a weekly low of $1.3160, as Carolyn Wilkins remarks about the pace of economic growth caused the Canadian dollar to strengthen, with BOC governor, Stephen Poloz reinforcing the hawkish slant, saying the next move would be a rate rise rather than a cut.