Tuesday January 26, 2016 - 18:25:29 GMT
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Will The FOMC Disappoint On Wednesday?
With all global markets currently highly correlated attention will be on the Fed tomorrow to see if it will support or disappoint what appears to be hope that it will follow the ECB with a dovish tilt to its statement. As with most central bank meetings, especially the FOMC, it is not so much what it says but what spin the market chooses to put on any change in language. As I pointed out in My Forex Forecast for the Week Ahead video, markets will be looking for anything to extend the end of last week’s relief rally. On the other side, let’s have a reality check. The Fed is stuck between a rock and a hard place. It can’t do an about face and admit that it made a mistake last month when it raised rates. As John Bland pointed out on the Global-View Forex Forum, Tuesday's Trading Thread GVI Forex john bland 14:03 GMT 01/26/2016 Market on hold into the Fed tomorrow. No rate change. Focus on tone of the statement. My best guess is they will provide almost no forward guidance.
What this suggests is that the Fed is not going to send any clear signals and it is up to those reading the tea leaves to spin it in a way that suits current sentiment. This also suggests that markets will remain both data and global markets dependent as many have factored out a March rate hike but without confirmation from a Fed that is likely to leave it on the table.
With expectations generally that the Fed will not raise rates in March given soft to mixed US data, low inflation and concerns over global markets, I am not sure what there is to disappoint. Perhaps it would be if the Fed tries to save face by ignoring reality and sticking to its rate outlook. On the other side, it is hard to imagine that the statement will not make some reference to what is going on globally.
In any case, as with any key news event, the reaction will be more important than the news itself. In this regard keep an eye on crude oil $30 as that will likely be used as a barometer of risk going forwards although it is merely the midpoint of what could be a $25-35 range. Look for equities to continue to follow oil and the forex market to follow equities until these correlations start to breakdown.
Jay Meisler, MBA, CTA
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