“What we’ve got here is a failure to communicate”, is a line from a great film, Cool Hand Luke, but it could equally apply to the policy machinations of the US Federal Reserve FOMC rate committee, let me explain. In September the Fed gave us a dovish hold, largely due to concerns about events overseas, and rather controversially, when the economic data was undoubtedly much better than it is now, yet six weeks later, we get a hawkish hold when we've seen a significant deterioration in that same US data, on top of another policy easing from the Chinese central bank, as well as the potential for additional easing measures, from the ECB. This does rather beg the question as to whether the Fed really has any idea at all about what it is trying to communicate. Certainly the decision by the US Federal Reserve to keep interest rates unchanged wasn’t too much of a surprise given the lack of a press conference, but the tone of the statement certainly was, particularly in light of the recent dovish comments from senior members of the Federal Reserve Board, and the recent slowdown seen in the most recent economic data. The statement’s hawkish tone would appear to suggest that the Fed is willing to go to great lengths to keep its options open with respect to keeping a December rate rise on the table, and keep the markets guessing. In the process the FOMC appears to be playing down any concerns it may have with respect to the strength of the US dollar and the continued weakness in the US manufacturing sector, and potentially the wider economy. It does run the risk however of giving the impression it has about as much clue as to what is going on with the US economy, as the rest of us, and that can’t be good for its credibility. As far as the statement was concerned the line about recent global and economic events restraining economic activity, was removed, while the committee stated that they were seeing solid gains in household spending and investment, which makes you wonder what data it is they are looking at, though it did acknowledge the slowdown in jobs growth, removing the line about an improving jobs market. The hawkish tone of the statement suggests that the FOMC is ignoring the recent evidence of a possible slowdown with respect to the US economy, and we will get an early test of that later today with the first iteration of US Q3 GDP which is expected to show a sharp slowdown to 1.6%, from the expansion of 3.9% seen in Q2. More importantly the Q3 core PCE gauge is expected to show a rise of 1.4%, down sharply from Q2’s 1.8% One man who will be happy at last night’s turn of events will be ECB President Mario Draghi, as the euro dropped sharply as the prospect of a US rate hike in December got put back on the table. It does go without saying though that the prospect of a rate move remains data dependant, nothing in the statement changed that. A lower euro will certainly help in the fight against deflationary pressures in the euro area and today we’ll get a reminder of that with the release of Spanish and German CPI numbers today. Spain CPI is expected to come in at -0.9%, and German CPI at -0.1%, while the German unemployment rate is expected to stay unchanged at 6.4% for October. EURUSD – yesterday’s failure to get above resistance at 1.1100 saw the euro drop sharply through the 1.0970 area and opening up the prospect of a move towards the May and July lows at 1.0820. We need to recover back through the 1.1115 area to stabilise the current downward momentum. GBPUSD – the pound continues to look soft, falling below the 1.5300 level opening up the prospect of further declines towards 1.5200 trend line support from the 1.4565 lows. Resistance sits at 1.5420 and 1.5510. EURGBP – the failure to recover back through 0.7250 yesterday saw the euro fall back sharply, with support coming in at 0.7145, 61.8 Fib retracement of the up move from 0.6935 to the highs this month at 0.7495. A move through 0.7145 has the potential to open up a larger move towards 0.7075. USDJPY – yesterday’s rebound has seen the US dollar pull back but the September highs above 121.70 continue to act as strong resistance. Above 122.00 could suggest a return to the 124.00 area. We have support at the 120.20/30 area, with a break retargeting the 119.20 area. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
Hawkish Fed keeps investors off balance.
20:00, 28 October 2015