Few Surprises from the FOMC
No surprises overnight as the FOMC did little more than confirm what we already knew; the economy is robust, but inflation is missing in action.
And while the FOMC was on everyone’s radar, to be frank, other than tax reform uncertainty inspired position covering and sporadic bouts of profit taking the FX markets remain stuck in the muck, but that’s about to change.
There’s a lot of factors in play on Thursday with the BoE meeting and the House Republican tax announcement, and for all intensive purposes, the cat appears to be out of the bag as Jerome Powell is reported to be the next Fed Chair to smiles and congratulations by all those concerned.
The tax reform release will no doubt send traders into information overload as the complexities of this deal will probably challenge even the most astute Chartered Accountant.
On the economic front, investors largely overlooked a fresh cluster of data despite the ADP Employment report showing a forecast-beating increase of 235,000 jobs (which was well above the forecast for a 200,000 rise). The dollar did get a small bump. but with bigger fish to fry, few were in the mood to push the greenback higher. But if anything can be gleaned from overnight price action is that a combination of robust data and a cheery Fed has resulted in a modest gain in US equity markets and a small bounce in USD sentiment.
The British Pound
The BoE is likely hike interest rates but will probably struggle to promote any market expectations to reprice more hikes in for 2018 given uncertainty about Brexit. Regardless , the market remains tentatively bullish on GBP on the rate differential curve while betting on a cleaner Brexit divorce proceeding heading into year-end.
Activity on the EURUSD was remarkably tame again.The anticipated USD follow through demand after the dovish ECB taper has failed to materialise, and with few surprises from the FOMC conviction, one way or the other trade remains hugely muted. I suspect traders will continue to respect the current ranges.
The Japanese Yen
The markets remain guardedly optimistic that the tax reforms will be in place by Christmas while traders discount the possibility of phasing in of tax changes on the assumption that something is better than nothing, In addition, the markets are hanging their hat on the fact that with no change in Abe’s cabinet it supports pro-economic growth policies to remain intact. Without sounding like a broken record, the long USDJPY trade continues to look favourable.
The Australian Dollar
Trade balance later today is expected to come out lower but for the most part, the Aussie should remain parked in Neutral until Fridays retail sales but with traders eyeing next weeks RBA and the real possibility of stronger worded dovish guidance, the AUD remains in a state of heightened vulnerability.
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