Interbank market news scan: Last week’s expectation of no Fed rate hike accompanied a lack of volatility in the foreign exchange market.

Last week, the Federal Open Market Committee of the Federal Reserve System decided to keep the target range for the federal funds rate between 5.00% and 5.25%. As the foreign exchange markets got closer to the 14 June 2023 decision, spreads in trade of EUR/USD, GBP/USD, USD/JPY, and AUD/USD got closer between 12 and 13 June 2023 and remained flat during the rest of the week.

According to data from OANDA, the EUR/USD, GBP/USD, USD/JPY, and AUD/USD experienced the following spreads between 12 June 2023 and 16 June 2023.

Currency Pair	June 12	June 13	June 14	June 15	June 16
EUR/USD	.00027	.00016	.00015	.00016	.00015
GBP/USD	.00044	.00021	.00021	.00020	.00019
USD/JPY	.059	.018	.018	.018	.018
AUD/USD	.00027	.00014	.00014	.00015	.00014

According to a study by the Bank for International Settlements, there is a positive relationship between trading volumes and volatility in foreign exchange markets. Bid-ask spreads, according to the study, are positively related to volatility. Both the spreads and volatility are impacted by the introduction of public information.

I believe that as data on expectations of a rate pause seeped through the foreign exchange markets, the markets became less volatile, with spreads tightening between 12 June and 13 June, and flattening through the rest of the week.

Of course, the next question is, will the FOMC resume rate increases next month?

Alton Drew

18 June 2023

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