FOMC minutes keep all rate options on the table.
19:00, 18 November 2015
· By CMC Markets
The early rebound at the beginning of this week took a bit of a pause yesterday as the events taking place in Paris stayed front of mind, in the process keeping investors on the back foot, ahead of last night’s FOMC minutes.
Just before the minutes we heard from three FOMC members making the case for a modest increase in the Fed Funds rate, though New York Fed President William Dudley’s assertion that policymakers don’t really know the effect a rate rise would have on markets, doesn’t exactly inspire confidence.
Sometimes there is such a thing as too much honesty, at least try and give the impression you know what you’re doing, even if you don’t. Using phrases like taking a “leap of faith” a la Atlanta Fed President Lockhart, isn’t particularly reassuring.
Last nights Fed minutes were pretty much as expected in that they pretty much set the scene for a potential rise in rates at the December meeting, with most participants saying that the conditions “could well be met”, but that still remains a long way from have been met, and if anything the minutes also highlighted how conflicted policymakers still are about the US economy.
There was also an interesting paragraph about exploring options “for providing additional monetary policy accommodation if the outlook for economic activity were to weaken”, which isn’t normally the type of language you would expect to hear from a central bank about to tighten policy.
It was also notable that most Fed officials saw diminished risks from abroad, but that was before the recent events in Paris, which could shift the debate in the coming weeks.
After two consecutive months of negative inflation and a dovish quarterly inflation report earlier this month we now appear to be getting a little bit of a counter narrative after Bank of England deputy governor Ben Broadbent attempted to steer the markets away from how the Bank’s inflation forecasts, might give a steer on the timing of an interest rate rise.
He asserted that investors should have a broader horizon and not “focus obsessively” on where the Bank pitches its glide path for inflation.
Mr Broadbent went on to state that policy decisions were better correlated with economic growth, and that the yield curve was not an accurate reflection of when rates might rise, which helped give the pound a little bit of pep as he reined back expectations that suggested a rate rise lay well off into the future.
He went on to say that the UK economy was holding up fairly well despite the recent slowdown in Q3 GDP.
Early indications on the PMI data do suggest that Q4 is ticking along nicely though we could well see an October retail sales hangover after the September surge of 1.9% which may well have come about as a result of the start of the Rugby World Cup.
Expectations are for a decline of 0.4%, but this needs to be balanced against quite a strong PMI reading for October, and BRC like of like sales earlier this month which showed a year on year decline of 0.2%.
EURUSD – having failed last week at 1.0820 the euro continues to look soft with the possibility of a retest of the March lows at 1.0460 very much on the cards. If we do manage to get back above 1.0830 we could see a run at the 1.0980 area.
GBPUSD – the pound continues to look a little soggy despite a rebound to 1.5270 late last week. A move back below 1.5160 suggests a retest of the lows last week at 1.5027, with major support at the 1.4980 area. Above the 1.5300 area retargets 1.5360.
EURGBP – the slide below the 0.7040 area negates the prospect of a rebound in the short term with the prospect of a move back towards the 0.6935 area and July lows. Interim resistance can be found at the 0.7080 area, and behind that at 0.7160.
USDJPY – yesterday’s rebound from the 122.20 area keeps the prospect for a move towards the 124.00 level as well as the possibility of a move through to the August highs at 125.30. Only a move below the 121.80 area would delay the prospect of this scenario unfolding.
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