Yellen’s intentions remain the same

The hot economic event of yesterday was the Federal Reserve concluding their two day meeting. The accomplishment of the FOMC during those two days was narrowed down into a few words in a statement. Here are 3 notable points about it:

1- Wording has changed, but intention remains the same

Referring to interest rates, the language has shifted from ‘rates will stay low for a “considerable time”‘, to ‘the Fed can be “patient” when it comes to raising rates’.

The difference, though incredibly subtle was enough for the market to initially view the general tone as more dovish, which would be understandable given current geo-politics, oil prices and low inflation. However, Janet Yellen was quick to reassure that the change in guidance does not mean a change of intentions and, though normalization is unlikely to be on the table for “at least a couple of meetings” it doesn’t mean it’s not going to appear on the agenda.

2- Oil Prices Effects could be temporary

The Fed were also keen to state that they are looking at oil prices and their effects as temporary and want to look past this when judging how best to control the future inflation outlook.

However, thanks to the recent slide in oil prices, the Fed decided to lower its inflation forecasts from the 1.5%-1.7% estimate range announced in September to just 1.2%-1.3% for this year. They also downgraded their inflation projections for next year while retaining their forecast range for 2016 and 2017.

As for employment, the Fed acknowledged the strong improvements in hiring and shared a brighter outlook for the jobs sector. The upper range for the jobless rate this year was lowered from 6.1% to 5.85% while the forecast range for 2015 was reduced from 5.2%-5.7% to just 5.0%-5.5%.
3- Ms. USA was happy on the forex dance floor

All of the above caused a very brief sell off in the Dollar, followed by a very sharp buyback which cause Ms. USA (AKA US dollar) to jump up on the forex dance floor. Any up moves Mr. Euro and, to a degree, Mr. British Pound had enjoyed over the past week or two was quickly erased as the market began to accept that a higher interest rate in the US is just a matter of time (albeit at least six months).

The Telegraph has an excellent, albeit fairly fatalistic, article on the effects that this will have on emerging markets, with the take away quotes being “They have collectively borrowed $5.7trillion in US Dollars, a currency they cannot print and do not control” “they are now short Dollars… and face the margin call from hell”.

European Business

In Europe, ECB member Coeure, who said earlier in the week that the markets were naive for being fascinated by QE has made an about turn and now says that he sees “a broad consensus around the table in the governing council that we need to do more…it’s not that much of a question of whether we should do something, but more a discussion on the best way to do it”. We’re sure everyone is thanking him for his consistent approach to market information.

Over in Greece the first round of Presidential elections has failed to see a new President elected. Next Tuesday will see another vote take place and if that one fails the final preliminary voting will be on the 29th December. After that, it’s open season in the general elections and Syriza still appear to have the edge in the opinion polls.

New Russian Currency Conditions

In Russia, conditions in the Rouble have improved somewhat, with a 12% rebound in the currency yesterday, its biggest move in that direction since 1998. An interesting piece in this FT article suggests that Russia’s central bank being generous in providing Rouble liquidity to the market lately has worked against the currency (as market participants take on the cheap financing and then sell the Roubles!).

Across the border, in Ukraine, there is an urgent need to fill a $15bn funding gap. As it stands the West is extremely reluctant to provide anything more than food aid, as they say lending funds without seeing credible signs of reforms would be nonsensical. It is now down to President Poroshenko to come up with those reforms and do so very quickly if he is to avoid defaulting on obligations with Russia and Europe.

Coming Up…

Today sees UK retail sales along with the German IFO survey in the European session. This afternoon sees US PMI readings, jobless claims and the Philly Fed index. All of which should have a noticeable impact on markets if they deviate at all from expectations.

Intraday Forex Technical Levels

EUR/USD 4-hour: Dropping.

Invest Diva positioning: Long positions above 1.2246 with targets at 1.2360 and 1.2474 in extension.

Technical reasons why: The pair continues to drop from the 50% Fibonacci level below the Ichimoku’s cloud, however there is a formation of a spinning top which could be an indication for a temporary reversal in the market trend. The RSI is going up below the oversold zone.

Alternative Scenario: Below 1.2246 look for further downside towards 1.2165 and 1.2056.