Fed Economic Projections and Powell Speech to Guide Markets

The US dollar is mixed on Tuesday ahead of the highly anticipated Federal Open Market Committee (FOMC) rate statement to be published on Wednesday. The market has already priced in a 25 basis points lift to the Fed funds rate. The economic projections and the speech by Chair Fed Powell will be dissected for insights into what the central bank sees in 2019.

The Fed has already hiked two times in 2018 and is on track for two more starting this week. Updates to the famed dot-plot will help investors understand how many more rate hikes do Fed members forecast for next year.

  • Fed likely to lift rates on Wednesday
  • API crude oil inventories rose by 2.9 million barrels
  • Reserve Bank of New Zealand (RBNZ) expected to leave rates untouched

Euro Rises on Political Stability and Inflation Green-shoots

The EUR/USD gained 0.17 percent on Tuesday. The single currency is trading at 1.1768 ahead of the September Federal Open Market Committee (FOMC) on Wednesday, September 26.

On Monday, European Central Bank (ECB) President Mario Draghi was optimistic about rising European inflation as a tight labor market is making way for higher wages.

The monetary policy divergence will continue as the Fed keeps rising rates while the ECB still has to wrap up its QE program and will star looking at hiking interests rates in summer of 2019 at the earliest.

Trade concerns have taken a backseat as the United Nations General Assembly has given more attention to different view points.

Brexit Optimism Boosts Pound

The GBP/USD rose 0.48 percent in the last 24 hours. Sterling is trading at 1.3180 versus the US dollar after positive reports surfaced from the EU and UK on their imminent divorce.

A EU internal document shows that there is still possibility of a free trade area between the two, but the area could not include all of Britain.

Although the news is far from positive, the fact that both sides are getting closer to a real alternative has boosted the pound.

Investors are still no clear on what the final deal or even if there will be one, but leaders are starting to put forward more realistic alternatives.

Loonie Sensitive to NAFTA Headlines

The Canadian dollar ended flat after US Trade Representative Lightizer said that time is running out with Canada on NAFTA talks. The US has pressured Canada to join the US-Mexico trade agreement but various deadlines have come and gone with no results.

The US wants to get this negotiation wrapped up as soon s possible to be able to present a trilateral deal to congress ahead of the mid-term elections.

usdcad Canadian dollar graph, September 25, 2018

Gaps remains between the two sides, with the most visible ones are access to the Canadian dairy market and the dispute resolution mechanism.

Elections in the province of Quebec, where a large number of dairy farmers are located, complicates matter as Canada realistically could not make big concessions until after the election.

The Canadian dollar is stuck in a tight range on Tuesday. Earlier in the session it was gaining on the US dollar, but the words from Lightizer put the loonie in a back foot, despite the rise in oil prices supporting the currency.

Gold Shines Ahead of FOMC

Gold is trading above the $1,200 price level at the start of the FOMC meeting in Washington.

The U.S. Federal Reserve is highly anticipated to announce a 25 basis points rate lift on Wednesday.

The move has already been priced in, but gold traders will be on the look out for insights on the economic projections and Chair Jerome Powell’s speech.

Gold has struggled as a safe haven under trade war concerns as investors have flocked to the safety of the US dollar, putting downward pressure on the yellow metal.

A neutral to dovish speech from Chair Powell could boost gold prices, specially if it comes from more mentions of trade turmoil risks.

Crude Falls as Trump Focuses on OPEC at UN

Oil prices are mixed on Tuesday. In the aftermath of the Organization of the Petroleum Exporting Countries (OPEC) and Russia meeting in Algiers the supply picture has not changed.

The sanctions against Iran have already had a negative effect and if major producers did not announce a ramp up there will be a short fall.

West Texas Intermediate graph

Prices continue near 4 year highs as geopolitical and weather factors have supported current price levels.

OPEC members appear to have learnt the lesson of four years ago. The oversupply battle waged against shale producers in the US caused energy prices to drop.

West Texas Intermediate graph

A coordinated approach to limit production has produced stability and at this point Saudi Arabia and Russia are leading a gradual path despite external pressure.

US President Trump made sure to mention how the OPEC is not doing enough to bring prices down, despite the efforts of the US to protect the region. The American president also hinted at the possibility of ramping up US crude production, a point that he has made before.

On August 20, the US sold 11 million barrels of oil from its emergency oil reserves, a minor data point in terms of volume but an important one that shows the willingness of the Trump administration to keep oil prices low.

During his address to the UN Trump mentioned:

In America, we believe strongly in energy security for ourselves and for our allies. We have become the largest energy producer anywhere on the face of the Earth.
The United States stands ready to export our abundant, affordable supply of oil, clean coal, and natural gas.

Market events to watch this week:

Wednesday, September 26
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Economic Projections
2:00pm USD FOMC Statement
2:00pmUSD Federal Funds Rate
2:30pm USD FOMC Press Conference
5:00pm NZD Official Cash Rate
6:00pm NZD RBNZ Press Conference
Thursday, September 27
8:30am USD Core Durable Goods Orders m/m
8:30amUSD Final GDP q/q
Friday, September 28
4:30am GBP Current Account
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse 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.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza