MARKET BRIEFING – LONDON OPEN 16.12.2015
The most momentous United States interest rate decision in almost a decade is less than 12 hours away.
It can be said with some justification that the Federal Reserve has communicated poorly its intentions to the markets and somewhat painted itself into a corner.
It would now be an extraordinary reversal if the FOMC does not increase the Fed Funds rate this evening.
Central Banks usually hike interest rates to cool off an overheating economy. However, although the US economy is showing positive signs the recovery has been patchy and does not encompass the whole country.
Inflation is not really a problem at the moment. In fact, plunging commodity prices as seen by the continued fall in the value of crude oil over the past week could actually hold back the possibility of the Federal Reserve’s 2% inflation target being met.
We can add to this cocktail, the prospect of deflation being imported into the US economy. This is due to the current easing stance of both the Peoples Bank of China and the European Central Bank.
For all of these reasons, one can understand why many analysts and even some members of the Federal Reserve Open Market Committee are questioning the merits of increasing interest rates today.
The foreign exchange markets tell their own story with its recent appreciation of EURUSD coming to an abrupt halt.
The markets have had time to digest the disappointing lack of action taken by the European Central Bank and its failure to increase as promised the stimulus to the Euro-Area’s flagging economy.
With currency traders having worked through last ECB announcement, the apparent topping formation in EURUSD would appear to be a sign that the markets are assuming that we will see an increase in the Fed Funds interest rate by 25 basis points.
A Fed Funds rate increase will only tell us half the story as there is real uncertainty over what shape the trajectory of future interest rate increases will look like in 2016.
Therefore, what is important to glean from today’s statement is the pace of future interest rate increases.
A dovish hike would see at the most two further rate hikes during 2016. Whereas a hawkish surprise could see as many as four rate hikes being announced by the FOMC during the course of next year.
I doubt very much that the Federal Reserve Chairwoman, Mrs. Janet Yellen will be so kind to give the markets exact numbers tomorrow on the amount and frequency of interest rate decisions for 2016. However, I would hope that the tone of the announcement to give us some strong clues.
I expect that this evening, the FOMC will give us a dovish hike. The reason for this is that the Federal Reserve is scared that it would be blamed that a hawkish surprise would derail the markets.
An over hawkish message will see the US Dollar race higher as both bonds and equities will get crushed.
The logical policy for the FOMC to take would raise interest rates a little now and then commit to tightening further as and when conditions allow it to do so.
EURUSD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.1050
Target 2: 1.0810
Projected range in ATR’s: 0.0119
Daily control level: 1.1060
GBPUSD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.5155
Target 2: 1.4920
Projected range in ATR’s: 0.0116
Daily control level: 1.5185
USDJPY
The intraday technical outlook
Trend 1 hour: Up
Target 1: 122.55
Target 2: 120.75
Projected range in ATR’s: 0.91
Daily control level: 120.55
USDCHF
The intraday technical outlook
Trend 1 hour: Up
Target 1: 1.0020
Target 2: 0.9800
Projected range in ATR’s: 0.0111
Daily control level: 0.9795
USDCAD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1.3835
Target 2: 1.3630
Projected range in ATR’s: 0.0102
Daily control level: 1.3780
AUDUSD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 0.7275
Target 2: 0.7100
Projected range in ATR’s: 0.0086
Daily control level: 0.7285
GOLD
The intraday technical outlook
Trend 1 hour: Down
Target 1: 1077.00
Target 2: 1044.00
Projected range in ATR’s: 16.12
Daily control level: 1079.50
OIL
The intraday technical outlook
Trend 1 hour: Up
Target 1: 39.00
Target 2: 36.00
Projected range in ATR’s: 1.61
Daily control level: 37.25
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