Fed Hikes Interest Rates; Dovish Hike | Vantage FX

Fed Hikes Interest Rates; Dovish Hike

December 17, 2015

Fed Hikes Interest Rates; Dovish Hike:

“FOMC hikes interest rates by 25bps to 0.25%-0.50% as expected.”

The US Federal Reserve has this morning raised interest rates for the first time in almost 10 years. With the move was widely expected by economists and market participants alike, all interested eyes were focused on the pace of subsequent rate increases now that a new cycle had begun.

The Federal Open Market Committee (FOMC) unanimously (no more chopping and changing!) voted to set the new Federal Funds Rate target range at 0.25% to 0.5%, up from 0.0% to 0.25%. You can read the full FOMC Statement here.

Following the expected lift-off, the market had already priced in the first rate hike in the decade, so the focus was going to be on the additional language and the insights given into Fed actions in 2016. Yellen essentially signalled that future interest rate movements will be “gradual” and in line with previous projections.

Key Quotes:

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.”

“The actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

“Stronger growth or faster inflation will warrant steeper pace of hikes”

That last little nugget of gold during Yellen’s press conference could signal the Fed’s willingness to hike at every subsequent meeting just as they have done in past hiking cycles, IF the data is there.

They want to evenly space their rate hikes, that’s what the Fed does. Now we wait and see how the data is interpreted. Interestingly enough, the FOMC Economic Projections signalled that Fed officials are not overly optimistic about a return to 2% inflation until well into 2018, with the projection down from 1.7% in September to 1.6% currently.

The Charts:
SP500 15 Minute:

Click on chart to see a larger view.

EUR/USD 15 Minute:

Click on chart to see a larger view.

On the SP500 15 minute chart, you can see that US equities saw an initial drop, followed by ripping to new highs. In yesterday’s daily market update, I said to forget conventional economics, you’re a trader now and to look for a clean out of stops at new highs even if we get the interest rate hike. The market gets what the market wants, and right now it looks like it still wants those stops!

The US Dollar move on the other hand, shown here on the EUR/USD 15 minute chart, was much more of a non event. After initially dropping (EUR/USD rallying), the move was reversed and we now sit back right where we started.

Even after all the chopping and changing leading into the announcement, the Fed actually did quite well in minimising short term market shocks, (eventually) clearly communicating their path and carrying out on their word. Volatility was minimised and from here it looks as though the Fed narrative is going to continue to play out in a slow grind. Credit where credit is due, it all worked out in the end… for now.

“Reuters poll: 13 of 19 primary dealers expect the next Fed rate hike to come in March.”


On the Calendar Thursday:
USD Federal Funds Rate (25bps Hike to 0.25%-0.50% as expected)

EUR German Ifo Business Climate
GBP Retail Sales m/m

USD Philly Fed Manufacturing Index
USD Unemployment Claims


Chart of the Day:
Where did the Oil has bottomed stories go? In Tuesday’s FOMC Lead Up blog, we featured Oil as our chart of the day, questioning the sensationalised headlines on the back of what the charts are actually telling us.

OIL 4 Hourly:

Click on chart to see a larger view.

The 4 hour chart shows the long term daily trend line that we have been watching, being clearly re-activated as resistance again. 1 bullish daily candle does not signal a bottom!

Is the opportunity in trading forex or trading oil?

Dane Williams – @VantageFX

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