Fed Goes Cold, on Hold

September 18, 2015

Fed Goes Cold, on Hold:
In a widely expected move, the Fed left interest rates unchanged overnight, forgoing the opportunity to make its first increase in more than 9 years.

Instead the Fed decided to take a wait and see approach, focusing on the major domestic issue of low inflation and of course the global economic uncertainty that has sent shockwaves through world markets over the recent past to justify its decision.

Other than the flagged issue of low inflation, the Fed was actually relatively upbeat on the outlook of the domestic economy, the doom instead coming from their outlook on international issues, most notably China.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

They wanted better news to come out of the recent labour market improvement to help spur inflation up to their target of 2%. Something that just never quite eventuated and the Fed chose to sit tight for another month.

Trying to read between the lines, it looks as if interest rates are still set for liftoff before Christmas. The most important aspect now that September has come and gone is the rate that the Fed is going to continue to hike now looks as though it will be significantly slower than before. The median forecast for the end of 2016 and 2017 moves 25bp lower than the previous forecasts and the conversation will now turn to October or December.

The Charts:
With the dust beginning to settle on the Fed’s decision to keep rates on hold, the relative quiet of the Asian session provides us a chance to assess the technical position of two of the major markets.

USDX Daily:
usdx4
Click on chart to see a larger view.

EUR/USD Daily:
eu4
Click on chart to see a larger view.

With the inverted picture of the two markets glaringly obvious, from a technical point of view not much has really changed. With price having drifted sideways and sitting in the middle of short term channels leading into the decision, the expected on hold decision hasn’t given the charts a lot of new material.

The fact that the guidance was generally hawkish, with a rate increase still on the cards possibly as early as October, how persistent the directional move on each chart can be, I’m not sure. With futures traders pricing in a 23% probability that the Fed hikes in October, a 49% probability by the December meeting and a 56% chance by January, as price approaches some key horizontal support/resistance levels you have a decision to make on whether you see opportunity to start fading.

———

On the Calendar Friday:
USD Federal Funds Rate (on hold at <0.25% v <0.25% expected) AUD RBA Gov Stevens Speaks CAD Core CPI m/m ---------- Chart of the Day:
The major with the wildest moves throughout the FOMC decision was most definitely the Aussie!

AUD/USD 15 Minute:
au6
Click on chart to see a larger view.

When the headline printed the largely expected decision of ‘on hold’, the US Dollar took a hit and the Aussie soared. The headline issues that were expected to negatively impact the USD were all there. Low inflation, a labour market that isn’t doing enough, even a strong USD was cited!

With the Aussie Dollar being the only one of the majors to see the huge drop after the initial headline spike, it can be put down to one statement:

“Monitoring developments abroad.”

China.

Do you see opportunity in trading AUD/USD?

Dane Williams – @VantageFX

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