FOMC, ECB - The Market Picked Its Moment
FX Daily | Jun 15, 2018 13:01
It has been a volatile 24 hours, with the aftermath of the ECB meeting turning into a USD rally which spread across the currency spectrum sending the USD Index back up to 95.00.
The night before was the FOMC meeting, and despite the hawkish moves by the Fed which saw a 25bp hike accompanied by a shift in the dot plot to 4 hikes (in total) for 2018, we saw a limited USD response, but this seems to have been a case of getting all the event risk out of the way before deciding on market direction.
Starting with the FOMC, there was no mistaking the message from the Fed, in that growth metrics are strong and with the outlook as positive as it is, they saw fit to firm up the short term rate path which is now widely expected to see another 25bp hike in both September and December of this year.
As from January 2019, every Fed meeting will offer up a press conference after the decision, but as Fed chair was quick to point out, this was in no way a signal that the FOMC are thinking of quickening the pace of normalisation.
Indeed, we have this already, and with the Fed now 4 moves away from returning rates back to neutral, we are back to data watching. On that, the strong retail sales reading for May was another sign feather in the cap for the Fed, and added to the the USD bid tone yesterday, with GDP revisions (higher) following and greater confidence that the tax cuts are feeding through in to the economy.
None of this is a revelation, but going forward, the market may start to feel that the aggressive turnaround in the USD will be tightening financial conditions from hereon on. We also have to watch the yield curve where the short end has naturally risen - 2-Yr now above 2.5%, but now trades at only a 37-38bp discount to the 10-Yr. Some of this was explained away by the Fed chair as timing (on short end reaction) as well as term premia, but for the USD, forward sentiment may start to waver unless near term positive factors are not feeding through to some longevity, with the 10yr Note unable to push back above 3.00%.
There could be a host of reasons for this, with risk switching into fixed income hard to distinguish, though we did see gold for example, sticking around the $1300 despite heavy USD strengthening. Even so, curve flattening has been a hot topic this year, so rate hikes pose as many questions on the longer term outlook as they are a shorter term policy response.
In contrast, the ECB has effectively given the market the signal that QE will end with one hand and offset it with the other by discounting a rate move until after the summer of 2019. This was at odds with some of the governing council members who wanted some firmer tightening guidance, but on the other side of the table, other members wanted to keep the bond buying program open.
Get The App
Once again, divisions are developing inside the council, but is of little surprise given the varying pace of growth between the member states. The dovish reaction was perhaps a little overdone, but was more a case of disappointment given a week of EUR buying against the USD flow in order to position for the announcement.
Short term positioning has seriously affected price action once again, but as we noted above, with all the information under their belt, asset managers and funds clearly showed where their preferences lie and for now it is with the USD.
h3 EUR/USD WEEKLY/h3Disclaimer: All information and content in this article should be viewed as educational only. Although the author, FX Daily Ltd. and its contributors believe the information and contents to be accurate, we neither guarantee their accuracy nor assume any liability for errors. The concepts and methods introduced should be used to stimulate intelligent trading decisions. Any mention of profits should be considered hypothetical and may not reflect slippage, liquidity and fees in live trading.
Unless otherwise stated, all illustrations are made with the benefit of hindsight. There is risk of loss as well as profit in trading. It should not be presumed that the methods presented on this website or from material obtained from this website in any manner will be profitable or that they will not result in losses. Past performance is not a guarantee of future results. It is the responsibility of each trader to determine their own financial suitability.
Original post
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.