FOMC’s Mind Made Up?

Buying rumour, selling fact…again

Friday’s employment report in the U.S. was the catalyst for traders to take profit on their long dollar positions, which had been built up as the possibility of a rate hike has grown to a probability and then to a near-certainty. 235k new jobs were added in the U.S. in February against a revised 238k in January.

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Markets mulling over data

The single currency rose by 1% to close at 1.0700. There is significant resistance at 1.0720 and the major resistance is at 1.0820/40 which has capped the Euro throughout 2017.

The Pound fell against the stronger Euro which gained by close to 1% trading close to .8780.

Looking ahead

While last week was all about significant data releases in the major global economies, the week ahead will be driven by the monetary policy decisions in the U.S., U.K., Japan and Switzerland.

A rate hike is now inevitable in the U.S. as the “conditions precedent” for a hike, as laid out by Janet Yellen, have all been met. It is almost inconceivable that a hike won’t happen when the FOMC meet on Tuesday and Wednesday.

I’m the U.K., the Monetary Policy Committee will also meet this week to decide interest rates. Traders will watch the vote, which has been 9-0 since the last hike in rates, but it is possible that there could be at least one dissenting voice following the recent Quarterly Inflation Report.

In his Budget this week, the Chancellor of the Exchequer lowered the “official” forecast for inflation to 2.7% but was a little more bullish on growth, seeing GDP at 2% in 2017.

Sterling falls against stronger Euro and Dollar

The surging dollar and euro tested recent highs against the pound. A rumour of Eurozone interest rate hike discussions has a machiavellian feel, following so close to hawkish remarks by Chancellor merkel and her ministers.

Concerns over a two-speed Europe were voiced at the Ecofin meeting yesterday by the Polish Prime Minister and perfectly illustrated the issue with a “one size fits all” monetary policy.

Interest rates remain benign for low risk economies

The safe-haven Japanese Yen and Swiss Franc are currencies that traders buy at times when there is perceived to be high risks in the global economy. The almost total lack of inflation in these countries adds value to their currencies.

This week the Swiss National Bank and Bank of Japan meet to determine interest rate policy. When the Swiss removed the pegging of their currency to the Euro a couple of years ago, it immediately rose by close to 25%. It has since traded in a relatively narrow range. Clearly the drop against the euro to 0.9000 from 1.20 was overdone and since depegging it has traded between 1.0230 and 1.0750. The SNB will likely continue with negative interest rates this week.

The Bank of Japan has been “fiddling” with monetary policy as long as anyone involved in the market can remember. Huge stimulus has been added to the domestic market to spur growth but the peculiarities of the Japanese economy which is the world’s fourth largest continue to defy their efforts.

The JPY remains quite volatile reacting more to events in the United States than a number of other major currencies. This is due to the close economic, strategic and military links the two countries have forged over the past fifty years.

This week’s events of note

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Monday

• ECB President speech – Given the remarks following yesterday’s council meeting a more hawkish tone is possible.

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Tuesday

• Eurozone Industrial Production – A rise from January’s especially weak data is expected.
• U.S. Producer Prices – A smaller increase is likely given the strength of the dollar.

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Wednesday

• Japanese Industrial Production – Strong economy belies the lack of inflation.
• Dutch General Election Result – Watch for Populist/Nationalist backlash.
• U.S. Retail Sales – A benchmark for consumer confidence. Expected slightly lower than January.
• U.S. Inflation data – Too late to influence the FOMC but expected to rise to 2.5% YoY.
• FOMC Rate Decision, Report on Economic Outlook and Press Conference – A hike 90% priced in. Recent data supports tighter monetary policy. Expect guidance on next hike.

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Thursday

• Australian Employment Report – Unchanged at 5.7% likely.
• BoJ, Rate Decision – No change but traders will listen carefully to press conference for changes in official language.
• SNB Rate Decision – Swiss retain negative interest rates to stave off currency strength. No change expected.
• Bank of England Rate Decision – voting result and minutes. No change expected but possible there will be one or two votes for a hike. Carney will be pressed on inflation following Chancellor’s budget comment.

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Friday

• U.S. Industrial Production and Capacity Utilization – What did the FOMC know in advance? Was the hike justified?

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