MARKET BRIEFING – LONDON OPEN 18.09.2015
Last night the United States Federal Reserve announced that it would be keeping its benchmark Federal Funds target interest rate on hold at 0.25%.
The decision not to move and increase rates at the September meeting was not a surprise, however, the dovishness of the ensuing press release and briefing was not expected.
Only Jeffrey Lacker of the Reserve Bank of Richmond being the only member of the committee to urge for a rate increase now. However the FOMC chairwoman did try to downplay the strength of the dovish sentiment by saying that the majority view of the committee members was that a rate increase is on the table and could happen before the end of 2015.
This brings me to a comment that Janet Yellen made which sums up the Federal Reserve’s thinking on the pending interest rate cycle when the chair of the FOMC chair told the assembled media that “at the end of the day, it’s all about the data”.
The Federal Reserve has two main mandates. These being to look after employment and inflation. With the unemployment numbers continuing to move in the right direction and with better recent data for both average earnings and Non-Farm Payrolls, the jobs picture although not completely rosy is at least no longer a paramount concern.
Furthermore with business confidence positive and the housing market now recovering the policy makers can now point to more positive signs for the United States economy.
So with the US economy seemingly performing well and much better than its competitors in Europe and Asia it is easy to see why Jeffrey Lacker would want to increase interest rates now.
The reason why the majority in the Federal Reserve decided to come down against pulling the trigger and increasing interest rates now was the continuing concerns over inflation. Only on Wednesday we had abysmal inflation data with the month on month CPI number posting a negative -0.1%.
With inflation now a long way from its 2% target the FOMC now has to deal with recent events that have affected China and other Emerging Market economies. The FOMC now has concerns that the slowdown in China combined with a strong US Dollar will have the effect of importing lower prices into the domestic economy.
The global economic uncertainty is also compounded by what is happening in Europe with the European Central Bank recently cutting its inflation target. The concerns in Frankfurt are so evident that the ECB president Mr. Mario Draghi will have real worries that deflation could take a grip of the Euro area.
The great unknown is of course China. What will be the effect of this country’s economic slowdown and financial crisis have on the global economy? This is the first major economic crisis that China has experienced since this country moved to a more open and capitalistic economy. China has grown rapidly and overtaken the likes of Germany and Japan to become the second-largest global economy. Therefore what happens in China can no longer be ignored.
The effects of globalization and the interconnectivity of global economies now make the task of the FOMC and its committee members all that much harder. The FOMC has now been transformed from being the central bank of the United States to the central banker to the world with Janet Yellen sitting on a very uncomfortable throne.
Back to the press conference and what we can take from it is that the big news was that there was no news with Janet Yellen reiterating that the FOMC policy decision making is sensitive to data. The chairwoman also went on to say that if data improves that the FOMC will move and increase the Federal Funds target rate. Janet Yellen also went on to say that if the data does not improve that the FOMC will not move.
The interpretation of this is that Janet Yellen and her colleagues at the FOMC are not sensitive to data but are actually hostages to data. Furthermore the decision to be indecisive has given the FOMC some leeway as this means FOMC is not tied to a calendar.
It also means that the markets have to beware of a possibility of the FOMC deciding to move on rates in October or December if the picture improves. However, the reticence and dovishness of the FOMC would mean that we would need to see an awful lot of improvement in both the inflation and global economic picture for this to happen. A rate increase before December does not seem likely.
So we now have another month of waiting. Just like a patient waiting for the nurse in fear of pulling off the plaster, the markets, especially in Asia and Brazil will be feeling some relief that the FOMC did not move. However, there is also a sense of urgency which is pushing the Federal Reserve to do the deed and go for an increase.
To be sure, there is going to be lots more volatility and a wild ride for all global markets.
EURUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.1535
Target 2: 1.1335
Projected range in ATR’s: 0.0099
Daily control level: 1.1210
GBPUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.5695
Target 2: 1.5480
Projected range in ATR’s: 0.0106
Daily control level: 1.5485
USDJPY
The intraday technical outlook
Trend 1 hour: Down
Target 1: 121.50
Target 2: 118.85
Projected range in ATR’s: 1.16
Daily control level: 121.00
USDCHF
The intraday technical outlook
Trend 1 hour: Down
Target 1: 0.9695
Target 2: 0.9505
Projected range in ATR’s: 0.0094
Daily control level: 0.9725
USDCAD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.3280
Target 2: 1.3080
Projected range in ATR’s: 0.0101
Daily control level: 1.3205
AUDUSD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 0.7260
Target 2: 0.7085
Projected range in ATR’s: 0.0090
Daily control level: 0.7140
GOLD
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1143.00
Target 2: 1118.00
Projected range in ATR’s: 12.63
Daily control level: 1115.00
OIL
The intraday technical outlook
Trend 1 hour: Up
Target 1: 49.00
Target 2: 45.00
Projected range in ATR’s: 2.11
Daily control level: 46.70
MORE ON ACFXblog.com