Since delivering a “hawkish” rate hike six weeks ago, the US Federal Reserve’s (FED) normalisation protocol has been denounced by both the US Administration and by Wall Street as threatening the stability of the domestic economy.
The extent to which the FED’s independence has been challenged was underscored by the fact that the FOMC prepared two separate policy statements at their recent meeting: one explaining the reasons for holding the FED funds target at 2.50%, and the other to outline the likely pathway and options for the assets rolling off the FED’s balance sheet.
The departure from the traditional policy transmission communication was a “dovish” signal for Forex traders, who pushed the USD close to 1% lower before FED chief Jerome Powell even took to the podium for his press conference.
During the last 24 hours, many market commentators have written that the FED has capitulated to these pressures and has signalled an end to the interest rate tightening cycle.
Despite Mr Powell using the word “patience” six times and the phrase “data dependent” five times during his press statement, we don’t agree that the external challenges have necessarily forced the FED to shift from their longer-term policy stance or tightening bias.
We have been following the FED’s policy meetings for many years. During Janet Yellen’s tenure as FED chief, the FOMC often times over-promised but delivered very little in terms of tightening financial conditions to normalise the extraordinary stimulus injected into the US monetary base over the last 10 years.
In this respect, it seems Mr Powell’s FED is being scorned for over-delivering by maintaining a transparent policy trajectory and following the dot-plots outlined in their quarterly economic assessments throughout 2018.
Listening to Mr Powell’s comments and responses during his press conference, it’s clear that the FED’s baseline view about the strength of the US economy has not changed and policy normalisation is a priority.
Perhaps the reduction of the balance sheet may not be on “auto-pilot” any longer, but it’s likely that the upcoming high frequency reports will support the current roll off schedule of $470 billion and two rate hikes this year.
The first key data set will be today’s US Non-Farm Payroll (NFP) report.
After last month’s higher-than-expect headline jobs number of 312,000, the consensus is for a more modest gain of 165,000. Considering the impact of the partial government shutdown over the last 10 weeks, monthly job growth in the 150,000 to 170,000 will be respectable. Weekly wage growth is expected to rise by .3% and the Unemployment rate should hold steady at 3.9%.
Our trade suggestion to sell EUR/USD at 1.1485 was filled, which lifts our average price to 1.1465. We suggest holding short from 1.1475 with an initial target of 1.1170 and a 1.1595 stop.
Despite weaker Chinese data and a chorus of local think tanks calling for the RBA to cut rates, the Aussie dollar has held on the the post-FOMC gains from Thursday. We consider the recent price action as corrective with technical resistance levels near .7310 and .7340.
Our trade suggestion to sell at .7185 was filled, which lifts our short position to .7175. We suggest medium-term traders can look to sell AUD/USD at .7290 with an initial target of .6970 and a .7370 stop.
Our short-term trade suggestion to sell the USD/JPY at 109.50 was filled but our initial target of 107.30 is currently out of range. We suggest lowering the buy-stop to 109.50 and raising the initial target to 108.15.
Our suggestion to add to short GBP/USD positions at 1.3235 was not filled, which leaves us short from 1.3155. We suggest lowering the buy-stop to 1.3155 and raising the initial target to 1.2875.
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