US Central Bank Worried About Market Impact of Rate Decision
The FOMC statement released on April 27 provided little clues on what the members of the Fed were thinking. The U.S. economy was seen improving, but after a rough start of the year the market had pared back the number of rate hikes to 1 to 2 this year. That meeting had no press conference so that is all investors had to go on until three weeks later the minutes from that meeting were published. The narrative suddenly changed from a noncommittal central bank with minor modifications to a statement, to a pro-active FOMC that was waiting for enough signals of economic recovery to launch another interest rate hike. The June rate hike went from a non-event to back on the table and sparked a USD rally. Mixed economic data and in particular the weaker than expected NFP that only added 38,000 jobs put probabilities back in single digits.
The CME FedWatch tool is showing a 2 percent probability of a change in interest rates on Wednesday, June 15. The July FOMC (no press conference) has 21 percent of a rate hike, September (press conference) 40 percent, November (no press conference) 42 percent
and December (press conference) 59 percent. It will be interesting to see how the dot-plot released on Wednesday, June 15 matches against market expectations. Given the presidential race will be in full swing in September it could be less likely the Fed will act, leaving July (no press conference) and December (press conference) as the clear options.
The June Federal Open Market Committee (FOMC) meeting will end with the release of the statement, economic projections on Wednesday, June 15 at 2:00 pm EDT. Chair Janet Yellen will deliver a prepared statement and address questions form the financial press at 2:30 pm EDT. There have been multiple signals about the Fed’s concerns about not wanting to add more volatility to the market, but the perfect window of opportunity for a rate hike is starting to fade which could force the Fed to opt for a FOMC without a press conference or wait until the end of the year once again. .
The EUR/USD has lost 0.666 percent in the last 24 hours. The pair is trading at 1.1208 and close to the low of the day after investors are selling EUR seeking a safe haven in case the Brexit vote wins the referendum next week. U.S. retail sales gave the USD a boost as the latest figures were above expectations. U.S. retail sales grew by 0.5 percent and removing the volatile auto component the growth was 0.4 percent.
U.S. consumers continue to exhibit both the confidence and the spending needed to keep the American economy on track. The positive results in economic indicator were more relevant after the miss in the employment data at the beginning of the month. As the strongest pillar, employment, is showing signs of slowing down; the strong retail sales given the importance of the U.S. consumer could offset the soft employment numbers.
Central banks shackled volatility after the credit crisis. Forward guidance left no uncertainty about the Fed’s statement. With the end of quantitive easing the job of the Fed has been more difficult as it requires them to communicate their intentions to the market while sailing in the same changing waters as the rest of investors. The Fed decision combined with the looming Brexit referendum are the two biggest risk events and traders need to position themselves for a variety of outcomes and hedge their exposure according to their individual risk management plan.
Market events to watch this week:
Wednesday, June 15
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am CAD Manufacturing Sales m/m
8:30am USD PPI m/m0.3% 0.2%
10:30am USD Crude Oil Inventories
Tentative NZD GDT Price Index
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
2:30pm USD FOMC Press Conference
6:45pm NZD GDP q/q
7:55pm CAD BOC Gov Poloz Speaks
9:30pm AUD Employment Change
AUD Unemployment Rate
Tentative JPY Monetary Policy Statement
Thursday, June 16
Tentative JPY BOJ Press Conference
3:30am CHF Libor Rate
3:30am CHF SNB Monetary Policy Assessment
3:30am CHF SNB Press Conference
4:30am GBP Retail Sales m/m
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30amUSD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, June 17
8:30am CAD Core CPI m/m
8:30am USD Building Permits
11:00am EUR ECB President Draghi Speaks
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar