Data Dependent Day as Fed Refuses to Commit

Yesterday’s FOMC statement did exactly what many expected and offered little new insight into the Federal Reserve’s interest rate intentions, instead putting all of the emphasis on economic data between now and the next meeting in September.

There were few changes between yesterday’s statement and that from June and it’s probably not worthwhile reading too much into the changes that were made. The fact that the Fed now needs to see “some further improvement in the labor market” makes little difference given that it was already very healthy. Two months of 250,000 job creation doesn’t necessarily guarantee a September hike any more than 180,000 would.

The claim that the “underutilization of labour markets has diminished” may be slightly more significant, as the inclusion of “somewhat” on the end of this last month implies there is still some way to go. Tighter labour markets usually lead to higher wages and with that, inflationary pressures. This belief could be why the below target inflation levels are not a concern to the Fed at the moment. Of course, this is just speculation and the reality is, again, this one word makes very little difference.

Overall, the statement was mildly hawkish and leaves a September rate hike on the table but everything depends on the data in the next couple of months. There is clearly a willingness to raise rates this year at the Fed but if the data over the next couple of months softens, they will not have any issue with waiting until December or just testing the water with a 0.1% hike.

With a September hike now being entirely data dependent, there may be heightened sensitivity to key U.S. data points, especially as we near the meeting. The first hurdle is today’s advanced GDP reading for the second quarter which will be key given that the economy stalled in the opening months of the year.

The U.S. is expected to have grown 2.6% in the last quarter, which under the circumstances is neither anything to write home about or something to panic over. I think the Fed would like to see a stronger rebound from the first quarter, although one of the key headwinds remains – strong dollar – as we’re seeing in company earnings at the moment. We’ll also get trade balance and jobless claims figures from the U.S. this afternoon.

There are a number of European data points being released this morning including unemployment and inflation figures from Germany and Spain, and a range of sentiment indicators for the eurozone. None of these are particularly heavy hitting releases but could contribute to some volatility in the markets this morning.

The FTSE is expected to open 9 points higher, the CAC 10 points higher and the DAX 32 points higher.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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