Fed on Hold: A Look at the Dot Plot and EUR/USD:
“USD Federal Funds Rate – <0.50% v <0.50% expected"
This morning’s FOMC decision and accompanying statement came and went as expected after announcing that the funds rate will be left in the same 0.25%-0.5% range since hike number one.
We talk a lot about the ‘dot plot’ both here and on social media so I wanted to go into a little more detail around what the graph actually means.
The dot plot is a graph that while not officially part of setting policy, provides markets with excellent insight into how the Fed as whole is feeling about interest rates heading into future meetings. As market expectations are key when it comes to fundamental analysis for Forex traders, the insight this graph shows is invaluable.
Each dot represents one FOMC participant and where they think that the Fed funds rate will be at certain time periods in the future. Each dot on the plot stays anonymous and obviously the further out the prediction, the more open to change it will be.
In terms of comparing this month’s 2016 dot plot to the last, the median fell from four hikes to just two. As mentioned above, looking further than that is always hit and miss so take the rest with a grain of salt.
As for the statement and press conference, global growth issues, jobs and inflation were again the key factors that the Fed focuses on when it comes to making the decision on when to embark on interest rate hike number two.
The Labor market has been on a steady improve with consistently good NFP numbers and a drop in the unemployment rate, but inflation has continued to be the rock blocking the path. Even with the most recent commodity price rebound, Yellen has made it clear that any pressure is being viewed as transitory within the Fed.
“Proceeding cautiously will allow us to verify that the labour market is continue to strength given the economic risk from abroad.”
Cautious, cautious, cautious…
Overall the Fed is still a lot more cautious than I expected them to be. The rhetoric is very slow and steady and ‘don’t shock markets’ looks to remain the mandate. Nobody can complain about that and both the bulls and bears shouldn’t have too much to complain about here.
Chart of the Day:
So what does all that mean for the US Dollar on the charts?
I’ve been speaking about some possible divergence between market expectation and actual pricing when it comes to the Fed’s next interest rate hike, but it seems I was too optimistic, too soon.
Taking a look at the EUR/USD daily chart, I’ve marked Draghi’s disappointment and then Yellen’s today which both sent the USD falling against the Euro (EUR/USD jolting hard to upside).
But compare the two moves and you can see which central bank’s policy is erratic in terms of shocking markets and which one is steady, delivering on what they say they consistently. Central bank policy doing what it is supposed to do, vs what it should avoid.
The hourly is just a zoomed in view to highlight both the move and the fib levels which I had left on my chart. We now have new highs, and any re-test of previous resistance as support is what we’ll be looking for from here.
On the Calendar Thursday:
NZD GDP q/q (0.9% v 0.7% expected)
AUD RBA Assist Gov Debelle Speaks
AUD Employment Change
AUD Unemployment Rate
JPY BOJ Gov Kuroda Speaks
CHF Libor Rate
CHF SNB Monetary Policy Assessment
GBP MPC Official Bank Rate Votes
GBP Monetary Policy Summary
GBP Official Bank Rate
USD Philly Fed Manufacturing Index
USD Unemployment Claims
Dane Williams – @VantageFX
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