As suspected last nights Fed decision did indeed polarise opinion, but to some extent they only have themselves to blame given the mixed messages policymakers have been giving out in the last six weeks or so.
The lack of any public pronouncements from Janet Yellen, the ambiguous comments from her deputy Stanley Fischer about the FOMC’s stance on inflation served to reinforce a narrative that was murky at best.
In reality the decision to hold rates shouldn’t really have been in doubt given the tepid wage growth and declining inflation, yet the fact that we only got one dissenter in the form of Jeffrey Lacker, President of the Richmond Fed suggests that there was probably a certain degree of unanimity.
While markets chose to focus on the improvement in the labour market in the lead up to this month’s meeting, it was clear from the July statement with the removal of the paragraph about the stabilisation in energy prices, that the Fed was concerned about renewed weakness in this area, yet there was very little attention paid to that.
It is now clear from the Fed statement that the FOMC does have concerns about falling prices and the line about being reasonably confident that inflation will move back to its 2% objective was probably a key factor in retrospect, which should have been given more attention.
It is also apparent that the Fed thinks that inflation is likely to fall further given its comments about international factors which would appear to suggest that they have the same concerns about further yuan depreciation putting downward pressure on prices.
More importantly, the decision to hold rates, was also accompanied by dovish dot plots with lower core inflation and Fed Funds projections, and yes a negative plot too. The Fed also downgraded their growth forecasts for 2016.
So having teased the markets for over a month, the question is what happens now and it seems that in the absence of a press conference in October it seems unlikely we will see any move on rates then which suggests a December move at the earliest, and even that might not happen as the Fed would need to give indications of a change in its inflation forecasts and it can only do that at the December meeting.
Last night’s move certainly caught the bond markets off guard as well as the FX markets, sending the 2 year yield tumbling sharply by 13 basis points. It also saw the US dollar fall back sharply, while US stock markets didn’t know what to make of it, closing mixed.
US investors appear to have been caught off guard a little by the slightly downbeat tone from the Fed about the US economy, but given the recent data this shouldn’t really be too much of a surprise.
The bigger question now is what this means going forward and it does shift the focus back to China, its economy and its stock market.
One thing appears certain, any certainty that the Fed decision would help remove the uncertainty around a possible rate rise has proved to be somewhat misplaced, and European markets could well open slightly lower this morning.
– up through the 1.1400 level now has the potential to retarget the 1.1700 highs seen in August? Pullbacks are likely to find support at the 100 day MA just above 1.1145, and trend line support from the August lows at 1.1195.
– having pushed through the 1.5570 area the pound now looks set to test the August highs at 1.5820. Long term support remains at the lows earlier this week at the 1.5330 area, but it also has some support between 1.5470/80 level. Only a fall below here retargets this week’s low.
– having failed to overcome the triangle resistance at 0.7375 the euro has slipped back but we still have support at 0.7250. A break through 0.7400 has the potential to target a move to 0.7500. Below 0.7230 suggests a return to 0.7180.
– yesterday’s failure to overcome the key triangle line resistance at 121.15, opens up the potential for a test of the support at 119.15. The US dollar still looks vulnerable to a return to the 116.20 area seen a couple of weeks ago, but for now appears to be range trading between 118.50 and 121.50.
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