Friday December 16, 2016 - 22:44:48 GMT
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Fed Surprises The Markets
John M. Bland, MBA
Markets Unprepared For Fed The capacity for the financial markets to surprise me has no limits. I felt U.S. markets should have been set up for months for the Fed policy decision on Wednesday. but apparently they were not. The Fed had signaled a rate hike in December for months, and as universally expected, the FOMC raised the mid-point of its 0.25%-0.50% target range (0.375%) for Fed Funds by 25bps to 0.50% to 0.75% (0.625%). Curiously into the Fed decision the EURUSD had been well bid. I figured traders must have been protecting themselves from a buy the rumor sell the fact whip saw, but no.
Markets were tripped up by the central banks "dot-plot" forecasts. All the members of the FOMC submit their forecasts for inflation, GDP, interest rates, etc. at the end of each quarter. These forecasts are compiled and then released to the public every three months. Their purpose is to be "transparent" in order to give the public an idea of how policy board members are thinking. Ever since the "dot-plots" were instituted several years ago, they have only shown how poorly those charged with managing the economy were forecasting the economy, they constantly have been overly optimistic about the economy and have over-estimated to the upside, the likely path of interest rates.
Now things have changed, the economy has finally started to improve on its own, and the election of Donald Trump as President has generated euphoria that the U.S. finally is about to see a pro-growth administration. At this meeting, apparently due to the prospective change in government, the "dot-plots" saw Fed members alter their FORECASTS for Fed Funds to three 25bp rate hikes in 2017 from the previously forecasted two. I don't see how one possible 25bp rate hike is such a cataclysmic event. It could be the Fed announcement was simply the catalyst for what was going to happen anyway, due to an improving economy and and a new pro-growth philosophy. This, and a couple of other recent wild price swings, suggest that the markets were not ready for the Fed announcement, and the current liquidity in the forex markets is lacking.
Current Market Conditions
The EURUSD has made new multi-year lows vs. the USD in the wake of the Fed policy announcement. The prospect of the interest rate spread between the U.S. and Eurozone has the markets expecting that capital flows could drive the USD higher in coming months. Keep an eye on the EURCHF cross. SNB efforts to contain the CHF could generate offset EURUSD demand.
The week ahead sports a full calendar with several end of year releases pulled forward by the end of year holidays.
WEEKLY HIGH IMPACT NEWS:
14:45 US- flash Markit Service PMI
03:00 JP- BOJ Meeting
15:00 US- Existing Homes Sales
15:30 US- EIA Crude
13:30 US- Weekly Jobless
13:30 US- Durable Goods
13:30 US- GDP
13:30 US- PCE Deflator
15:00 US- New Homes Sales
15:00 US- University of Michigan Survey
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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