5:00 PM (EST) Update
Now that the dust has settled and the much awaited Federal Open Market Committee (FOMC) statement has secured its spot in the federal reserve’s press release section, lets dig in and see how it affected the market, and more importantly,what we could expect to happen to Ms. USA on the forex dance floor.
1- Fed leaves interest rates unchanged
Not that we were eagerly awaiting a liftoff today, but the Fed left its key interest rate near zero and this could have been a disappointing piece of news to those few hopefuls who were predicting a rate rise as soon as July. This is probably the reason why Ms.USA started the first few minutes after the release on a down-move; market participants who bought the rumor and sold the news.
The US dollar selloff was very short-lived, because the dollar bears probably immediately realized that a rate cut would have been out of the ordinary for the Fed since its chairperson Janet Yellen didn’t even have a press conference scheduled for after the statement release. And we all know that our cutey pie, Janet Yellen isn’t really a big fan of big surprises anyway.
2- Labor Markets Improve
Officials in their policy statement cited “solid job gains” and declining unemployment. The characterization of hiring gains was an upgrade from the Fed’s June policy statement, which noted job gains had picked up. The Fed also slightly tweaked its assessment of slack in the job market, saying underutilization of labor market resources had diminished, striking an earlier qualification that slack had diminished “somewhat.”
This could explain the US dollar strength following the initial bearish reaction.During the Fed’s June statement dollar bulls had to cut their party short when the Fed also announced downgrades for their employment and growth forecasts, but this didn’t seem to be the main issue this time.
3- Inflation Indicators Remain Low
If you were awake during the Fundamental Beans on Invest Diva’s Forex Coffee Break (shame on you if you were sleeping!) you should know that inflation and interest rates are interconnected. Higher interest rates result in lower overall growth and lower inflation. This happens because when interest rates are higher, consumers and businesses borrow less, save more, and invest less.
In its statement on Wednesday, Fed characterized economic growth as moderate but said inflation indicators “remain low.” This was probably the main blow up to the face because for a rate hike to happen soon, we definitely want to greater inflation. But as the master of poker that they policy makers are, they continued to say that the Fed will tighten policy when it sees “some further improvement in the labor market,” adding the modifier “some,” and is “reasonably confident” inflation will move back to its 2 percent goal over the medium term.
When inflation gets high, the Fed tries to control it by raising interest rates.
4- Poker Face Continues on Rate Hike
I would fear playing Texas Hold’em against Fed Head Janet Yellen because unlike me, her face is anything but an open book. While many invest divas/ divos were anticipating the FOMC would provide at least few code words indicating that it was ready to move on with a rate hike, the Federal Reserve declined to provide any clues about when a hike is on the way.
Some optimist analysts viewed the use of the term ‘transitory’ with respect to commodity prices as slightly more hawkish than anything else. But still the Fed did not put itself in a position where it had to hike at the next meeting.
Since we have been at zero for so long, many market participants do not expect a rate hike until December, with a 57 percent chance, up slightly from 55 percent prior to the Fed announcement.
5- Dollar Corrected its Previous Losses
Although July’s Fed statement wasn’t as exciting as some investors were hoping for, at least it wasn’t a massive disappointment. If anything, it at least brought the power back to Ms. USA against her major dancing partners and potentially even helped the US dollar to get back on track with her up-moves. This was most visible in the USD/JPY pair where the happy couple bounced back above the Ichimoku cloud, and touch-basing with the key resistance level of 124.
Ms. USA started the Sydney session higher after the FOMC statement, signaling more hopes for dollar gains in the coming periods.