Market News & Insights
14 December 2016

Fed’s Christmas Gift: 25bps

The USD recovered very slightly on Tuesday, consolidation ahead of tonight’s Fed announcement has resulted in the greenback seeing little directional bias since Monday’s sell off. The dollar experienced moderate advances against GBP, EUR and JPY over the course of the day but it certainly wasn’t one way traffic. GBP started the day on a positive tone following firmer than expected CPI inflation figures, and yet the pound failed to advance beyond its December 6th highs. Oil prices continued higher through much of the European session yesterday, while European stocks also continued their advance higher. In the US, positivity remained in equity markets, record highs were once again posted with the Dow Jones ending up less than 100 points lower than the key psychological 20,000 level. The NASDAQ and S&P were also on the rise through much of yesterday, however the positive sentiment has flattened overnight with Asian bourses changing little overnight with the exception of the Hang Seng up over .5%.

Today, all focus will be forward to this evening’s FOMC statement. The Fed have done their job in convincing markets that they will raise rates by 25bps, and with US data firmer through H2, this is almost a given for this evening. So the Fed will hike rates by .25% tonight, what everyone wants to know now is if the Fed see any acceleration in the pace of rate hikes through 2017 and beyond. The USD was slightly firmer through yesterday and thus far today is trading relatively flat but with the greenback still trading around 13 year highs, our view is that downside risk for the greenback is more likely that additional upside. So much has already been priced into the USD, and should the Fed even mimic their last Fed statement then we would expect selling of the USD to dominate the evening’s action. Anything slightly cautious or concerns about downside risks will be taken as dovish and as such, the USD will likely hand back some of its Q3 gains which sees the USD up almost 6% in Q4. Now, should the Fed look to take a more aggressive approach to tightening, the USD will have some scope to rally but how far and how high will depend on how positive the Fed are on to recovery. Retail sales and PPI data is released ahead of the FOMC, but follow through is limited given the larger event expected later in the day.

GBP received a boost yesterday as headline CPI inflation rose 1.2%, up from .9% in October, while the core reading grew at a rate of 1.4%, up from 1.2%. This is a rapid ascension towards the BOE’s 2% target and the impact of the weaker GBP and lower rates will likely grow stronger through Q1 next year. We did see GBP rally, with GBPUSD once again testing towards Decembers’ highs above 1.2700, but just failing to reach towards the 1.2775 highs. GBPUSD sellers are lined up above 1.2700 it would seem, but we have a particular interest between 1.2775/80 area where a confluence of resistance lines up. It may take the Fed tonight to break above this area, and if that happens we have our target back towards 1.3000. 1.2530/50 area offers some support for buyers of GBP, while a break below their offers progression lower towards 1.2385 area. EURGBP tried and failed to progress above the 200 day ema yesterday, resistance above .8400 area has sellers lined up all week and we are still looking for a retest of lows just above .8300. Failure to break here result in a press higher. Labour market data from the UK headlines today’s morning data docket, while tomorrow the BOE are in town, although no change is expected from them.