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NBK report: Fed expected to raise interest twice in 2016
March 21, 2016, 8:24 am

This week, the US Federal Reserve kept interest rates unchanged and indicated that reasonable US economic growth and strong labor market performance would allow it to tighten policy in 2016, with fresh projections showing Fed officials expecting two quarter-point interest rate hikes by the year's end, half the number projected last December, showed an economic report.

The US Dollar plunged after the Federal Reserve scaled down its own expectations of the number of US rate hikes likely over the next nine months. Meanwhile, the rally in global foreign exchange market continued, currencies such as the Japanese Yen and Swiss Franc rallied on the back of the risk-off trade. The US Dollar Index opened the week at 96.161 and dropped to a five month low of 94.578, and closed the week at 94.063, said the report released by the National Bank of Kuwait (NBK).

The Euro rose significantly last week, extending its previous week's gains and surging to a five-month high, as financial markets continued to digest the dovish monetary policy decision from the Federal Reserve. The Sterling Pound extended its gains against the US Dollar after the Bank of England maintained interest rates on hold and cautioned that increasing doubt over Brexit could adversely affect the economy, it said.

On commodities, commodity-linked currencies rose strongly as products such as oil and iron ore soared after the Fed's decision. Brent crude reached three month high of USD 41.71 a Barrel, it added.

The US central bank left interest rates unchanged at 0.50% as expected. However, there were little changes to the statement from the January meeting, the new FOMC projections now see 2 rate hikes during 2016, instead of the four previously expected. Moreover, Growth projections were lowered from a median of 2.4% to 2.2% for 2016 and inflation measured by Personal Consumption Expenditures was lowered to 1.2% from 1.6%, the report indicaed.

US retail sales dropped less than expected in February, but a sharp downward revision to January's data could reignite concerns about the economy's growth prospects. Retail sales dipped 0.1% last month as automobile purchases fell.

The number of Americans applying for unemployment benefits rose from a five-month low last week, but stayed below a level associated with a firming labor market as the economy recovers momentum after a slow fourth quarter. Initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 265,000, it said.

Housing starts increased 5.2% to a seasonally adjusted annual pace of 1.18 million units last month, the maximum level in five months, it added. The Euro zone industrial production improved more than expected in January, supported by increased output of capital goods. Industrial production was 2.1% higher in January than in December, and grew by 2.8% year-on-year, the NBK report concluded.

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