What had been a relatively quiet day for trading kicked into overdrive following the afternoon Fed announcements. Indications of continuing rate hikes through 2018 sparked a rally in the US Dollar and sent liquidity fuelled stock markets sinking.
The Fed indicated that US employment growth remains strong and raised its 2017 GDP forecast to 2.4% from 2.1%. The central bank indicated it expects the impact of recent hurricanes on the economy and inflation to be significant but temporary and to fade in the medium term.
As expected, the FOMC has decided to launch its balance sheet normalization program in October under the plan announced back in June. This has the potential to drain away some of the easy money that has provided rocket fuel to stock markets in recent years but at the same time reflects a stronger economy that no longer needs emergency support.
More importantly, the dot plot of Fed Funds projections shows that 11 members still support one more rate hike this year, likely in December, and 9 members are projecting 3-4 rate hikes in 2018. This was clearly a more hawkish stance than the street had been expecting as the US Dollar rallied on the news while indices started to sink.
The NASDAQ 100, home to a lot of technology and momentum stocks was hit the hardest in the pullback and also was impacted by a selloff in its largest component stock, Apple fell 2.0% on the day on reports that iPhone 8 sales are tracking lower than previous models, confirming fears that the 8 could get squeezed between consumers getting tired of incremental upgrades and cannibalization from the flashier iPhone X coming later in the year.
It has been another active day for trading in crude oil as well. Iran’s President unleashed a series of retaliatory tweets against President Trump’s UN speech which raised the prospect of growing tensions in the Middle East, particularly among oil producing countries. The price slumped back toward $50.00 late in the day, however, as the Fed inspired US Dollar rally impacted commodity prices.
The combined impact of a USD rally and oil selloff dragged the loonie down late in the day. AUD and NZD gave back some of their earlier gains but managed to remain in the green. NZD may remain active through the day particularly around pre-election polls with market action clearly indicating the street favours National over Labour.
Yen performance has been mixed heading into today’s main Asia Pacific event, the Bank of Japan meeting. With a snap election pending, it’s unlikely Governor Kuroda is going to make any policy changes, but with the ECB talking tapering while the Fed and Bank of England talk about raising interest rates, the Bank of Japan’s ultra-dovish stance is looking increasingly lonely. Because of this, Yen pairs could trade actively today.
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