FOMC Action Triggers Demand for Higher Risk Assets
On Tuesday, the Federal Reserve left its benchmark interest
rate unchanged and reiterated that interest rates would remain low for â€śan
extended periodâ€ť. In its statement, it also mentioned that inflation remains
subdued, and that the weak employment situation seems to have stabilized. While
this may sound rosy, the Fed did express concerns about housing and employer
reluctance to increase payrolls.
The tone of the statement suggests that while the Fed seems
to have a plan as to how to begin reducing stimulus and returning interest
rates to normal, it still is having trouble deciding when to initiate the first
rate hike. One obstacle it faces is the possibility it will kill the recovery
if it hikes too soon. The other more important obstacle is inflation. Although
by its standards, inflation is low, there is a possibility that all of the
liquidity that has been pumped into the financial system may trigger a spike in
The overall dovish tone of the statement gave the go ahead
for traders to continue to use the Dollar as a funding currency thereby driving
up demand for higher risk assets.
The U.S. Dollar is trading lower overnight. This is
triggering an increase in demand for higher risk assets such as equities, gold
and crude oil
The March Euro is trading better on increased demand for
higher yielding assets as well as improving conditions in Greece. Traders still feel Greece will receive a bailout from Germany and France. Donâ€™t forget about the huge
amount of shorts in this market. A short-covering surge could occur at any time
if short begin to panic because of the current rally.The charts indicate that 1.4009 is the next
likely upside target.
The March British Pound is biggest gainer overnight. The
initial move was fueled by a report showing that U.K. Jobless Claims
unexpectedly fell in February. The strong surge to the upside was triggered by
the news that the BoE members voted 9 -0 to leave its quantitative easing
program unchanged. Following this news, a strong up move ensued, driving this
market through a pair of 50% levels at 1.5271 and 1.5297. The next upside
target is 1.5419.
Overnight the Bank of Japan voted to leave interest rates
unchanged. In addition, it doubled its loan program designed to combat
deflation. The March Japanese Yen is trading lower this morning. The charts
indicate that a break through 1.1019 is likely to trigger an acceleration to
the downside. The increased demand for higher yielding assets is likely to
pressure the Japanese Yen as traders continue to use this currency as the
funding currency of choice.
The March Swiss Franc is trading higher. The higher the Euro
moves, the less likely the Swiss Franc will intervene. This is helping to
support the Swiss Franc. The first upside target on the charts was reached last
night at .9526. There may be a technical bounce at this level, but if upside
momentum persists, then look for a further rally to .9608 over the near-term.
Stronger demand for higher risk assets such as equities,
gold and crude oil are helping to boost the March Canadian Dollar. The trend in
this market is decisively lower and likely to continue until this contract
The prospect of lower interest rates for an extended period
of time is helping to drive the June Treasury Bonds higher. Yesterdayâ€™s FOMCâ€™s
decision is giving traders confidence to take this market higher. Strong upside
momentum could drive this market through a pair of main tops at 118â€™02.
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Tue 31 July 2018 AA JP- Bank of Japan A 06:00 DE- Retail Sales A 09:00 EZ- flash HICP/GDP AA 12:30 US- Core PCE Deflator A 14:00 US- CB Consumer Confidence Wed 1 Aug 2018 A Final Mfg PMIs AA 12:15 US- ADP Private Payrolls A 15:00 US- EIA Crude AA 18:00 US- Federal Reserve Decision Thu 2 Aug 2018 AA 11:00 GB- Bank of England Decision A 13:30 US- Weekly Jobless Fri 3 Aug 2018 A Final Services PMIs AA 12:30 US- Employment A 12:30 US/CA- Trade
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